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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: ‘permanent as equity loans’

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

‘Permanent as equity loans’

It is very common for companies to fund overseas subsidiaries through loans as well as through equity. In some cases, the parent company will advance a short- or medium-term foreign currency loan to the subsidiary to meet some particular requirement, with the intention that the loan will be subsequently repaid (and not replaced). When the subsidiary repays the loan, any exchange gains or losses on the loan will be reflected in the parent company’s cashflows. It is reasonable in these circumstances for exchange differences on the loan to be dealt with through the profit and loss account.

But in other cases, the parent company intends to provide long-term finance for the subsidiary. The group has no plans for the loan to be repaid - it forms part of the permanent capital structure of the subsidiary, in the same way as equity financing. Even trading balances can occasionally be used in the same way, if the parent allows the subsidiary to defer repayment of the outstanding balance more or less indefinitely.

SSAP20 allows such ‘permanent as equity’ loans and deferred trading balances to be treated as non-monetary items and be carried at historic rates on the balance sheet rather than be retranslated as at each period end. The standard does not define what is meant by ‘permanent’ - and clearly such loans can sometimes be repaid if group financing arrangements change - but companies will usually treat loans to overseas subsidiaries as being ‘permanent as equity’ where there is no intention that they be repaid in the foreseeable future.

Where a ‘permanent as equity’ loan is hedged by foreign currency borrowing or by a currency contract, companies may offset exchange differences on the borrowing or currency contract against those arising on the loan (see CFM26140).

Note on IFRS, New UK GAAP and FRS 23 under Old UK GAAP

Accounting for such exchange differences through reserves is only possible under SSAP20 and would not be permitted for companies adopting IFRS, New UK GAAP or FRS 23 under Old UK GAAP.