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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching: SSAP 20 treatment

Matching under SSAP20

This applies to all companies which do not adopt IAS.

Where certain conditions are met, SSAP 20 allows (but does not require) exchange gains and losses on the following investments to be taken to reserves:

  • shares in foreign enterprises
  • long term loans to foreign enterprises, which are intended to be as permanent as equity (i.e. they are not intended to be repaid in the near future)
  • inter-company deferred trading balances which are, again, intended as long-term finance.

This involves revaluing non-monetary assets such as shares as if they were monetary assets to calculate the exchange differences, and then taking them to reserves to match against exchange differences on any borrowing which is matched to the asset. This is known as the ‘cover method’, or ‘net investment hedging’, and there are examples of how it works at CFM62030 and CFM62040. ‘Net investment hedging’ is possible at individual company level as well as in consolidated accounts under SSAP 20, unlike IAS.

The conditions which have to be met to use the cover method are:

  • The accounting treatment must be consistently applied.
  • Exchange gains and losses on matched borrowings cannot exceed exchange differences on the investment. Any excess must go to the profit and loss account (see the example at CFM62040).
  • The matched borrowings should not exceed the cash that the investments are expected to generate whether from profits or otherwise. No guidance on measuring this is given in SSAP20. In practice, if the subsidiary is making profits, borrowings can be matched up to the book value of the investment - which may be cost, or a ‘directors’ valuation’ based on the net asset value of the subsidiary. If the investment is not expected to become profitable, it may be necessary to limit the offset to the net realisable value of the investment.

Under SSAP20, companies must disclose the net amount of exchange gains and losses identifying the amount taken to reserves and the amount in the profit and loss account.

Although SSAP 20 is silent on the subject, derivatives such as a forward contract or swap can be used to hedge an investment against exchange rate movements in exactly the same way as a matched loan. UK GAAP permits use of the cover method where a currency contract is used. So exchange differences on the currency contract would be taken to reserves to cover the exchange movement on the investment.


If matched shares are used in a repo transaction but nevertheless are recognised as an asset on the balance sheet in accordance with UK GAAP, the matching remains effective for tax purposes.

Closing rate/net investment method

There is one other circumstance in which exchange gains and losses are taken to reserves under SSAP20. This is where a company has an investment in a branch/subsidiary that prepares its accounts or financial statements in a local currency other than sterling and it is correct accounting practice to do so. When the results of the branch are consolidated any exchange differences arising are taken to reserves. This is because an exchange difference relating to balance sheet translation would distort the branch’s profit, as the branch is not necessarily exposed to exchange differences with sterling. This is followed for tax purposes. Although taken to reserves, these exchange gains and losses have nothing to do with the cover method of accounting. These exchange gains and losses will never be brought into account for tax purposes.