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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching under the Disregard Regulations: periods beginning on or after 1 January 2008

Election for net asset value matching: periods beginning after 1 January 2008

Regulation 4A was replaced by a new regulation 4A (plus new regulations 4B and 4C), with effect for periods of account beginning on or after 1 January 2008. Companies may elect to match the higher of the accounts value of the shares and the value of the net assets underlying the shareholding, regardless of whether or not they have previously matched ‘net asset value’ under SSAP 20.

Where a company does not make an election, for forex matching purposes it must use the value of the shares that is shown in its accounts. This is the case even where it had previously matched some different value under SSAP 20, and this treatment was subsequently ‘grandfathered’ under the previous version of regulation 4A(1)(a), see CFM62710.

Conditions for election

An election for ‘net asset value’ matching applies only to shares (and not to ships or aircraft) where those shares are matched with loan relationships or derivative contracts under condition 2 of either regulation 3 or regulation 4.

Where shares are matched under condition 1, this treatment will take priority. However, in some cases, a company that has designated a liability or derivative contract as a hedge of exchange risk arising from shares in a subsidiary may be restricted to ‘matching’ the cost of the shares, because it is unable to ascertain the fair value of the shares sufficiently accurately to account for them at fair value.

Suppose, for example, the company has shares which cost 100, but have an underlying net asset value of 140. Regulations 3(3) and 4(3) refer to assets being matched to ‘the greatest possible extent’. Where the company has matched 100 under condition 1, there is no objection to it achieving matching ‘to the greatest possible extent’ by electing for net asset value matching and matching the remaining 40 under condition 2.

Companies that continue to account under SSAP 20 will also normally be able to rely on their accounting treatment, under which exchange differences on hedges may be taken to, and offset in, reserves under the cover method. Where this accounting treatment is adopted, the primary legislation in CTA09/S328 or CTA09/S606 will apply, and there should be no need to invoke condition 2. HMRC staff should refer to CT&VAT (Financial Products Team) in any case where a company accounting under SSAP 20 seeks to ‘top up’ the amount matched under condition 2.

An election is irrevocable: and it will apply to any future shares acquired by the company, as well as to shares held at the time when the election is made. Where a company already holds shares that are matched under condition 2, it must make the election by the later of

  • 31 March 2008 and
  • 30 days from the start of its first period of account beginning on or after 1 January 2008.

The company might not, at the start of this first period, hold any shares that are matched under condition 2 of either regulation 3 or regulation 4. There are a number of reasons why this might be so. The company may not hold shares that give rise to a forex exposure; it may hold such shares, but the exposure is not hedged within that company; or the company may still account under SSAP 20, and not have needed to rely on satisfying condition 2; or it may have relied on satisfying condition 1.

In any such case, the company can make an election within 30 days of the date on which shares are first matched in accordance with condition 2. The election then has effect for the accounting period in which it is made, and all subsequent periods.

Regulation 4A(8)(a), if read in isolation, might be seen as implying that the election must be made by 31 March 2008 (or, if later, within 30 days of the first accounting period beginning on or after 1 January 2008) in any case where shares are held at the beginning of the period, regardless of whether or not they are matched in accordance with condition 2 at that time. However, regulation 4A(7)(b) makes it clear that an election applies only to shareholdings that are so matched, and HMRC takes the view that ‘shares’ in regulation 4A(8)(a) relates narrowly to matched shares that are within the scope of the election.

Information with an election

A company that makes an election must, at specified intervals in the accounting period, review the extent to which liabilities or derivatives are matched to shareholdings. The company can choose the length of ‘review period’ it wishes to adopt (provided that the period does not exceed 92 days). But it must specify the length of review period that it wishes to use when it makes the election. CFM62800 explains the rules on review periods.

There is no set form or template for elections, but they should be made in writing, specify the name of the company and the length of the review period, and be signed by an officer of the company (or a person to whom a company officer has delegated authority). Companies in a group may each decide independently whether or not to elect.

Effect of election

Where an election for ‘net asset value’ matching has been made, the net asset value must be determined in accordance with the rules described at CFM62760. A company accounting under SSAP 20 may have computed the exchange differences taken to reserves on the basis of a ‘directors’ valuation’ of shares (which might, for example, use acquisition cost plus post-acquisition retained profits). And it may, under the former regulation 4A(1)(a), have continued with this basis of accounting in periods beginning on or after 1 January 2005. Nevertheless, if it makes an election the company must abandon this basis and use the statutory method.