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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: example

The need for ‘forex matching’: example

Zenbath Ltd had borrowings of $3,000,000, entered into after the company’s forex commencement day (CT13300). This partly hedged a $6,000,000 investment in a US subsidiary.

The pound was worth

$1.5 at 1 January 1997

$1.6 at 31 December 1997.

In the accounts to 31 December 1997 the sterling equivalent of the liability was £2,000,000 at the beginning of the year and £1,875,000 at the end, so the company made an exchange gain of £125,000.

The shares on the other hand had decreased in value from £4,000,000 to £3,750,000 because of the same exchange rate movement.

Under SSAP20 the company would take both the loss of £250,000 on the shares and the gain of £125,000 on the loan through reserves. But under FA 1993, had there been no provision for matching, the company would have to make an adjustment in the computation to tax the gain on the loan of £125,000 even though that gain was fully covered by the loss on shares in the accounts. Therefore, it would be possible for a company to pay tax on a gain on a loan when the matched loss was unrelieved until the sale of the shares.