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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: foreign operations: closing rate/net investment method

Where the closing rate/ net investment method is used to translate the results of a foreign operation, the accounting standards require:

  • the company’s net investment in the foreign operation is translated at the closing rate of exchange.
  • the amounts of profit or loss and other comprehensive income (or STRGL under Old UK GAAP) of the foreign operation are typically translated at an average rate for the period (see further below).
  • all exchange differences arising as a result are accounted for through reserves (as amounts of other comprehensive income).

See CFM26240 for an explanation of how exchange differences arise when the closing rate/net investment method is used. There is an example at CFM26250.

CFM26230 explains in what circumstances the closing rate/net investment method is used.

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

For companies adopting IFRS, New UK GAAP and FRS 23 under Old UK GAAP, amounts of profit or loss and other comprehensive income (or STRGL) should strictly be translated at the rate applicable to the individual transaction, but an average can be used provided it gives a reasonable approximation.

SSAP 20 under Old UK GAAP

SSAP 20 under Old UK GAAP leaves it open for the company to choose between using the closing rate or using an average rate. In practice, using an average rate has become almost universal. But, whichever the company chooses, it must apply it consistently from one period to another. Using the closing rate maintains the relationships shown in the financial statements of the foreign operation but SSAP 20 justifies use of an average rate by saying that it better reflects the impact of cash flows throughout the period from the group viewpoint.