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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: SSAP 20: contractually fixed exchange rates

This guidance applies to companies which have adopted SSAP 20 under Old UK GAAP.

Exchange rates fixed by a contract

Where a company contracts to settle a transaction at a particular rate of exchange, paragraph 46 of SSAP20 under Old UK GAAP requires that the exchange rate fixed by the contract must be used to record the transaction.

Example

In 20X5, Selvakan Ltd buys a computer system from a US manufacturer for $800,000. The contract specifies an advance payment of $50,000, a further $400,000 to be paid on delivery, and the balance when the system has been successfully installed. All payments are to be made at an exchange rate of $1.55/£. The company acquires the computer system on 1 March 20X5.

The company will record the purchase of the computer system at the contracted rate of $1.55/£ (i.e. at a cost of £516,130), regardless of the spot rate at 1 March. It will translate the payment of each instalment of the purchase price at the same rate. Thus no exchange differences will arise. Even if some of the price remains unpaid at 31 December 20X5, the liability will be translated at the contracted rate.

This treatment reflects the economic reality - the company is going to have to pay precisely £516,130 for the computer system, irrespective of how exchange rates move.