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HMRC internal manual

Corporate Finance Manual

Foreign exchange: accounts drawn up in a foreign currency: designated currency election: conditions

Conditions for making an election

An investment company can make a designated currency election where it meets one of two conditions.

Condition A: significant proportion of assets and liabilities are in the designated currency

The first condition (condition A) set out in CTA10/S9A(4) is that a significant proportion of a company’s assets and liabilities are denominated in the designated currency.

‘A significant proportion’ is not defined and will depend on the facts of individual companies but will, in general, be the currency to which the investment company has the most exposure as a result of owing foreign currency assets or owing foreign currency liabilities. A common sense approach should be adopted which takes into account not just the proportion of currency assets and liabilities but other factors such as the relative exchange rate volatility of different currencies.

Condition B: the consolidation condition

Condition B in CTA10/S9A(5) sets out the consolidation condition. The investment company making the election (company X) and another company (company Y) meet the consolidation condition where company X’s results are comprised in the consolidated financial statements of the group of which Y is the ultimate parent company under acceptable accounting practice.

Acceptable accounting practice is defined as IAS, UK GAAP or the GAAP of the country in which Y is resident. If Y’s group does not prepare consolidated accounts for a period in which the designated currency election is made, company X can still meet the consolidation condition where its results would be comprised in Y’s consolidated statements if such statements were prepared under IAS.