CFM82340 - Old rules: disposal of convertible security pre 2005: bringing foreign exchange differences into account

Treatment of forex on disposal of convertible security

This guidance applies to periods of account beginning before 1 January 2005

Under FA96/S92, securities which are convertible into shares are treated, from the holder’s point of view, as chargeable assets rather than loan relationships provided that certain conditions are fulfilled.

If a S92 security is denominated in a non-sterling currency, exchange gains or losses will arise on retranslation. Prior to FA 2002, such exchange gains and losses were taken into account as part of the chargeable gain or allowable loss on disposal of the security. S92 securities were not qualifying assets within the FA 1993 forex regime. But FA 2002 amended S92 so as to bring exchange gains and losses on all convertibles into loan relationships (where the convertible is unmatched), with adjustments to the disposal consideration to prevent double counting.

Where a S92 security has been hedged by a liability or currency contract and the ‘forex matching’ rules apply, it is therefore necessary to treat the pre FA 2002 exchange gains or losses on the hedging instrument separately from those arising post FA 2002. This is summarised below.

Accounting periods beginning before 1 October 2002

Gains or losses arising in accounting periods beginning before 1 October 2002 are brought back into account as chargeable gains or allowable losses under Reg 4(1), SI2002/1970

Accounting periods beginning on or after 1 October 2002

Gains or losses are brought into accounts as loan relationship credits or debits. However, these credits or debits are calculated by taking whatever exchange losses or gains on the asset would have been brought into charge but for FA96/S84A(3), and reversing them. See example in CFM82350.