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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Accounting for corporate finance: foreign exchange: scope

SSAP 20

SSAP20 under Old UK GAAP provides a standard for foreign currency translation of transactions a company has entered into directly which are denominated in a foreign currency. In addition it also addresses a second problem. As well as (or instead of) undertaking foreign currency transactions on its own behalf, a company may invest in an enterprise that operates, and keeps its financial records, in a foreign currency.

One of the most common ways a company can invest in a foreign entity is to hold shares in an overseas subsidiary. If the subsidiary accounts in a foreign currency whilst the consolidated group financial statements are prepared in sterling, it will be necessary to translate the assets and liabilities in the subsidiary’s balance sheet, and its profit and loss account, into sterling before its results can be incorporated into the consolidated accounts.

SSAP20 sets out how this should be done. This is covered in more detail at CFM26200 onwards.

A company may also have one or more branches that keep financial records, and draw up financial statements, in a foreign currency. The company will need to translate the branch results into sterling in order to incorporate them into its individual company accounts. This is almost precisely the same problem as translating the accounts of a foreign subsidiary, and is also dealt with by SSAP20. This is covered in more detail at CFM26210 

‘Foreign branch’ tends to conjure up a picture of an office or factory located in an overseas territory, conducting its own operations with its own staff. But SSAP20 defines branch more widely than this. For example, a shipping company might account for an individual ship, and all the receipts and expenses associated with that ship, as a branch, where the ‘part business’ represented by the ship operates in a foreign currency.

SSAP 20 requires a company to translate its foreign currency transactions and its foreign operations into its local currency. The local currency of a company is defined as the currency of the primary economic environment in which the company operates and generates cash flows. It is assumed, although not stated in the standard, that the company will prepare its accounts in the local currency.

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FRS23, IAS 21 and New UK GAAP

These standards also require a company to translate its own foreign currency transactions as well as its foreign operations. However these transactions have to be first translated into its functional currency and then into its presentation currency (if different).

Functional currency is the currency of the primary economic environment in which the company operates. This is very similar to local currency so the potential for differences to local currency should be limited. However, these standards give more detail on how to assess a company’s primary economic environment. The consideration of whether an entity shares the same economic environment as its parent has not been common practice under SSAP 20. Therefore, it is possible that under these standards the functional currency of a company may be different to its local currency under SSAP 20 if a subsidiary has no significant degree of autonomy from its parents.

Presentation currency is the currency in which the financial statements are presented and is a matter of choice. The standards set out how to translate the accounts into the presentation currency if different from the functional currency and that the resultant gain or loss is taken to other comprehensive income. Such adjustments are not brought into tax as the taxable profits are calculated based on the functional currency of a company. This is covered in more detail at CFM64110.