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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching: what is matching?

What is matching?

Matching is not a statutory term. It describes a situation best illustrated with a simple example.

Suppose a UK holding company has a foreign subsidiary. The value of the shares (the initial foreign currency investment translated at the spot rate) in the subsidiary will go up and down as sterling rises or falls against the currency in which the shares are denominated. The company may wish to provide a measure of protection against these movements in currency values, and one way of doing this is to take out a loan in the same currency as the shares. This is called ‘hedging’. The effect is that any movement in currency which reduces the value of the shares will also reduce the amount to be paid back on the loan.

Under SSAP 20, shares are treated as a non-monetary asset. The value of the shares is recorded in the accounts at initial acquisition and any exchange differences will not be taken into account until the shares are finally sold. But loans are monetary assets and changes in value are taken to the profit and loss account on each balance sheet date. This means that, although in practice one transaction hedges the other, and exchange differences are cancelled out, each part will be treated differently in the accounts. There is an example of this at CFM62020.

The rules at SSAP 20 attempt to deal with this situation by matching the treatment of the asset and liability to the extent that one covers the other. The way this works is that the company is permitted to take the exchange difference on the shares as well as on the matched liability to reserves and net them off. This treatment is often referred to as the cover method. If the liability exceeds the asset, then only the exchange gain or loss on the matched part of the liability is taken to reserves, with the remainder going through profit and loss as normal.

There is an example of the cover method at CFM62030 and one where cover is only partial at CFM62040.

Although in the example above the liability and asset are taken out in the same currency, this is not essential. It is simply necessary for the hedge to be commercially effective, see the example at CFM62050.

A wider range of assets and liabilities than shares and the loans to fund those shares can be matched in this way, and you may hear the term ‘net investment hedging’. For example, a company may use a currency derivative, such as a cross-country swap, as a hedge.

There is more on the accounting treatment under SSAP 20 at CFM62060. Note that the rules for companies which adopt International Accounting Standards (IAS) are not the same, see CFM62070.

The tax rules work by following the treatment under SSAP 20. Gains and losses on loans taken to reserves are ignored but a mechanism exists for bringing these back into charge when the asset is finally sold. There is an overview of the tax rules at CFM62210.


There are anti-avoidance rules that apply to forex matching. These are described at CFM63100.