CFM64440 - Accounts drawn up in a foreign currency: rates used for translation: change in tax calculation currency: example of carried forward losses
Example of carried forward losses
During the year ended 31 December 2018, a company has a functional currency of US$. During the year ended 31 December 2019, the functional currency of the company changes to sterling.
The taxable results are as follows:
| Year ended 31 December 2018 - | $12m trading loss |
|---|---|
| Year ended 31 December 2019 - | £2m trading profit |
| Year ended 31 December 2020 - | £20m trading profit |
The relevant $/£ exchange rate is the spot rate on 1 January 2019: 1:1.5
The first step is to translate the dollar loss in 2018 into a sterling loss. This would be at the spot rate on 1 January 2019 (1:1.5) and results in a sterling loss of £8m.
As all profits after 31 December 2018 are computed in sterling, the £8m loss would be offset as per normal rules - i.e. £2m offset in 2019 and the remaining £6m offset in 2020. There is no need for any further translations.