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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Foreign exchange: accounts drawn up in a foreign currency: functional currency and presentation currency

IAS 21, FRS23 and SSAP20

IAS 21 is the International Accounting Standard on Foreign Exchange, and it has been introduced into UK GAAP as FRS 23. For companies which adopt FRS 23 it supersedes SSAP 20 (CFM26000). SSAP 20 remains in force for those companies that do not adopt IAS or FRS 23. It was implicit in SSAP 20 that a company would draw up accounts in its local currency, but IAS 21/FRS 23 permits a company to use any currency to prepare its accounts even where it is not the functional currency. Two currencies are defined for the purposes of IAS 21 and FRS 23.

Functional currency

This is defined for tax purposes at CTA10/S17(4). The functional currency is the currency of the primary economic environment in which the company operates. This may be sterling or another currency.

IAS 21/FRS 23 sets out a number of objective indicators for determining a company’s functional currency, such as the currency that influences the price for which goods and services are sold, and the currency that influences its costs of labour and other expenses. Where the indicators give mixed results, the management of the company must make a judgement.

In many cases, the company’s functional currency will be the same as the ‘local currency’ that it had under SSAP 20. However, in some more complex groups, the functional currency of an intermediate holding company, for example, may under IAS 21 and FRS 23 be influenced by the functional currency of its parent. In some cases this may make it more difficult to determine the functional currency of a company in circumstances where the company would have a different functional currency when viewed in isolation. This may, in practice, lead to a change of functional currency for accounting and therefore tax purposes.

Presentation currency

Under IAS 21 or FRS 23 a company can present its financial statements in any currency. The currency in which the financial statements are prepared is known as the presentation currency. Where the functional currency differs from the presentation currency, the functional currency must be disclosed in the accounts. The general tax rule is that whatever the presentation currency, CT profits or losses must be calculated by reference to the functional currency. The term presentation currency is not used in the legislation - instead the rules refer to the currency in which the accounts are prepared.