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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching under the Disregard Regulations: overview

Overview of matching in periods beginning on or after 1 January 2005

Listed entities have to adopt International Accounting Standards (or UK equivalents) in their first accounting period to begin on or after 1 January 2005. Any entity using fair value accounting for its financial instruments must adopt these standards for accounting periods beginning on or after 1 January 2006. It is expected that UK accounting standards will eventually fully converge with International Accounting Standards but that date has yet to be agreed.

International Accounting Standards and UK equivalents require different accounting treatment for liabilities, assets or derivatives hedging exchange exposure on shareholdings than was the case under SSAP20. As the tax matching treatment under CTA09/S328(3) (for loan relationships) and CTA09/S606(3) (for derivatives) was based upon SSAP20 accounting treatment, new rules were required for those companies using International Accounting Standards (or UK equivalents).

The most straightforward matching situation is where a company holds shares in a subsidiary whose activities are based or conducted in a country or currency other than those of the company itself. (The shares themselves may also be foreign currency denominated). The company is therefore at risk from foreign exchange movements because the value of the investment will fluctuate with exchange rate movements. It takes out a loan in the currency in question or a derivative over the currency to hedge this exposure. It may wish to have the exchange movements on the liability/derivative matched for tax purposes with the opposite movements on the asset.


Dopmet Ltd, a company accounting in sterling, has an investment, €200,000 of shares in an Irish company. The exchange rate at 31 December 2006 is £1:€1.32 whilst the rate at 31 December 2007 is £1:€1.45. On the accounting date at 31 December 2006 the investment is worth £151,515. At 31 December 2007 it is only worth £137,931 producing an exchange loss on the asset of £13,584.

The company can avoid this exposure to exchange rates by taking out a €200,000 loan. This produces an exchange gain to match the exchange loss.