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HMRC internal manual

Corporate Finance Manual

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Foreign exchange: matching under the Disregard Regulations: review periods: examples

Examples of ‘review period’: periods of account beginning on or after 1 January 2008

Example 1

Z Ltd is a company that has made a ‘net asset value matching’ election. It stipulates that its review period will be 3 calendar months. The company prepares accounts to 31 December.

This means that its first review period will begin on 1 January 2008, and subsequent periods will begin on 1 April, 1 July and 1 October 2008. Each of these dates will be a ‘relevant time’.

Z Ltd holds 100% of the shares in A Inc, a US subsidiary, and hedges its investment in this foreign operation by means of a loan of $200 million. The book value of the shares is $50 million.

On 1 January 2008, the net asset value underlying the shares in A Inc is determined to be $230 million. The $200 million liability is therefore fully matched at that point. For the period 1 January to 31 March 2008, all of the exchange gains or losses on the liability are left out of account.

At 1 April 2008, the net asset value underlying the shares is $250 million. On 25 April, the company borrows a further $100 million, increasing the liability to $300 million. For the period 1 April to 30 June, $250 million of the liability is matched: exchange gains or losses on that portion of the liability in excess of $250 million are not disregarded.

At 1 July, the net asset value has again increased, to $290 million. All but $10 million of the liability is therefore matched for the period 1 July to 30 September. On 1 October, the net asset value is $310 million and the liability is once again fully matched. However, on 1 December there is a group reorganisation, as a result of which Z Ltd holds only 80% of the shares in A. The shareholding continues to be regarded as the same asset, but the underlying net asset value will reduce as a result of the change. This reduction will not, however, affect the period 1 October to 31 December 2008. It will be reflected in the extent of matching determined at the next review date, 1 January 2009.

Example 2

A company which prepares accounts to 31 December makes a net asset value matching election, stipulating its review period to be 50 days. Its review times in year ended 31 December 2008 are therefore 1 January, 20 February, 10 April, 29 May, 19 July, 7 September and 27 October. There is no review period starting on 16 December 2008, because a 50-day period starting on that date would extend beyond 31 December and therefore violate the rule in regulation 4C(4) that the last review period must end on or before the last day of the accounting period. Any changes to net asset values occurring between 28 October and 31 December will not alter the tax outcome: the revised extent to matching will be determined on the next review date, 1 January 2009.

Example 3

A company, which prepares accounts to 31 March, makes a ‘net asset value matching’ election and specifies a review period of one calendar month. At 1 April 2008, it holds shares in a subsidiary with a Euro functional currency, and hedges the exchange risk through a portfolio of Euro/sterling cross-currency interest rate swaps. Its review dates are therefore 1 April 2008, 1 May 2008 and so on.

On 15 July 2008, the company acquires shares in a second subsidiary, again with a Euro functional currency. It enters into further swaps on 17 July to hedge the exchange risk. Thus derivative contracts first begin to be matched with the second asset on 17 July. Under regulation 4C(3), the company must ascertain on 17 July to what extent the new asset is matched. But it does not have to look afresh at the net asset value underlying the shares in the first subsidiary - the extent to which this is matched remains unaltered.

On 1 August, a new review period begins for both assets, and thereafter the company must review both assets on 1 September, 1 October and so on to determine the extent to which each is matched.