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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: accounts drawn up in a foreign currency: the rules from 2005 onwards

FA2004 and FA2005 changes

FA 2004: periods beginning on or after 1 January 2005

Changes to the Companies Act in 2005 meant that UK companies could draw up their accounts either in accordance with UK GAAP or with International Accounting Standards. At the same time new accounting standards were issued under UK GAAP to bring it more into line with IAS, including a new standard on accounting for foreign currencies. This meant that the currency accounting rules could no longer rely exclusively on SSAP 20. They had to accommodate IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’, which was implemented into UK GAAP UK as FRS 23. Adoption of either FRS 23 or IAS 21 is mandatory for listed entities for accounting periods beginning on or after 1 January 2005, and for companies using accounting policies that are consistent with the fair value measurement rules of the Companies Act, for accounting periods beginning on or after 1 January 2006. Other entities have the option of adopting FRS 23, though only if they also apply FRS 26 ‘Financial Instruments: Measurement’. Companies that do not adopt FRS 23 or IAS 21 will continue to use SSAP 20. See CFM26000 for more on accounting standards.

The FA 2002 legislation (FA93/S93A - FA93/S94AB)) was repealed, and replaced by new sections 92A to 92E, (now at CTA10/S5 to 9). FA93/S92, which sets out the basic rule that CT profits are to be computed in sterling (CFM64100) was amended. The changes have effect for periods of account (not accounting periods) beginning on or after 1 January 2005. So, for example, if a company prepared accounts for an 18-month period beginning on 1 January 2004 - and therefore had an accounting period 1 January 2005 to 30 June 2005 - the new rules would nevertheless not apply until the start of the next period of account on 1 July 2005. This commencement provision applies even where a company incorporated outside of the UK may have been permitted or required to use IAS earlier than 1 January 2005.

The main changes from the previous new legislation are as follows.

  • IAS 21 and FRS 23 allow accounts to be drawn up in any currency. The currency in which the accounts are drawn up (the presentation currency) does not have to be the functional currency.
  • There is no specific rule for dealing with cases where part of a business is calculated in a different currency.
  • Carry forward of losses, management expenses and non-trading loan relationship debits is in sterling only.
  • There is no general rule retained for translation of foreign currency amounts, only a specific rule for translation of foreign currency profits into sterling.

FA 2005

A rule was added to deal with the transition from the FA 2002 to the FA 2004 rules - CFM64160.