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HMRC internal manual

Corporate Finance Manual

Accounts drawn up in a foreign currency: FA 2009: change in operating currency: example of carried back losses

Example of carried back losses

This guidance applies to all accounting periods beginning on or after 29 December 2007

A company has a functional currency of $US in the year ended 31 December 2008 and made a taxable trading profit of $50m.

In the year ended 31 December 2009 the company changes its functional currency to Euros and makes a loss of Euros75m. The company elects to carry back the 2009 loss against the 2008 profit.

During both accounting periods, the company’s results relate to numerous transactions and it is considered that the ‘appropriate exchange rate’ should be the average exchange rate for the accounting period. Relevant exchange rates are:

£/$: average rate: y/e 31 December 2008 - 1:1.5

$/€: spot rate on 31 December 2008 - 1:1.25

The first step is to translate the Euro losses that are to be carried back into Dollar losses. This will be at the spot rate on the last day of the last accounting period during which the Dollar was the functional currency; i.e. 31 December 2008 - 1:1.25.

The next step is to translate the Euro losses into sterling losses at the same rate of exchange as the profits that are being offset are translated into sterling. As the exchange rate of the profits and losses will be the same, this will mean that up to $50m of losses could be offset (for the purposes of this example, assume that the company wants to offset the full amount of the $50m profit).

The maximum amount of loss that can be carried back is the Euro equivalent of $50m. Using the 1:1.25 $/€ spot rate on 31 December 2008, this equates to €62.5m. Consequently, €62.5m are carried back thus offsetting the $50m profit in that year.

This leaves €12.5m of losses to be carried forward, effectively in Euros, for offset against future trading profits in accounting periods after 31 December 2009. These will not be translated into sterling until they are offset against future profits.