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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: tax rules on exchange gains and losses: accounts drawn up in a foreign currency

Exchange gains and losses where accounts are in non sterling functional currency

Most companies operating in the UK prepare accounts in sterling. They convert all amounts denominated in foreign currency back into sterling.

However, you need to remember that a company can draw up accounts and computations in a foreign currency if certain conditions are met (see CFM64000 on currency accounting). In such cases, exchange differences will only arise if the company has assets or liabilities denominated in a different currency than that used to prepare the accounts.

Example 1

A company prepares its accounts in euros. It takes out a euro loan from the bank.

The interest and the capital on the loan are recorded in the accounts each year. As the original loan was expressed in the euro, and the accounts are drawn up in euros, there is no comparison with a second currency. No exchange gain or loss can arise.

Example 2

The company also has a holding of UK gilts. This holding will be translated from sterling into euros at accounting dates and exchange gains or losses will arise if the exchange rate differs at the two accounting dates.