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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: basic principles: initial recognition of transactions

Translating transactions

The basic principle for translating foreign currency transactions in an individual company’s accounts is the same irrespective of which standard is being applied.

Transactions

A transaction, such as a sale or a purchase, is translated at the rate of exchange in operation at the date of the transaction. An average rate may be used unless there have been significant fluctuations in exchange rates.

Example

Selvakan Ltd, a manufacturing company which draws up accounts to 31 December, purchased raw materials from a French supplier for €1,000. It recorded the transaction on 1 June 20X4, the date of the supplier’s invoice. On that date, the exchange rate was £0.59/€. It therefore recorded the purchase price as £590.

On 28 June 20X4 the company sent a draft for €1,000 to the supplier. The exchange rate on that date was £0.61/€. Thus the company records a payment of £610 - it has made an exchange loss of £20.

As an approximation to translating transactions at the spot rate for each day, the company can use an average rate of exchange provided that the currency in question does not fluctuate significantly. For example, a shop selling tourist souvenirs, which accepts large numbers of cash payments in dollars and euros, might translate foreign currency sales at an average exchange rate for the week, or the month. However, it wouldn’t be appropriate for a company which has a small number of high value foreign currency transactions to use an average exchange rate. This would not give a reasonable approximation to using the spot rate for the day of each individual transaction.

Exception under SSAP 20

The basic principle doesn’t apply where the company is accounting using SSAP 20 under Old UK GAAP and is contracted to settle the transaction at some different exchange rate - see CFM26070. There is no similar exemption when accounting under FRS 23 under Old UK GAAP, IFRS or New UK GAAP.

Another exception is provided by SSAP 20 under Old UK GAAP where a non-monetary item such as shares are hedged by a long-term liability. See CFM26140.