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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 forward losses

Example of carried forward losses

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

During the year ended 31 December 2008, a company has a functional currency of US$. During the year ended 31 December 2009, the functional currency of the company changes to sterling.

The taxable results are as follows:

Year ended 31 December 2008 - $12m trading loss
Year ended 31 December 2009 - £2m trading profit
Year ended 31 December 2010 - £20m trading profit

The relevant $/£ exchange rate is the spot rate on 1 January 2009: 1:1.5

The first step is to translate the dollar loss in 2008 into a sterling loss. This would be at the spot rate on 1 January 2009 (1:1.5) and results in a sterling loss of £8m.

As all profits after 31 December 2008 are computed in sterling, the £8m loss would be offset as per normal rules - i.e. £2m offset in 2009 and the remaining £6m offset in 2010. There is no need for any further translations.