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HMRC internal manual

Corporate Finance Manual

Old rules: forex and accounts drawn up in a foreign currency: tax rules on exchange gains and losses pre 2005

Approved accounting method

This guidance applies for periods beginning between 1 October 2002 and 31 December 2004

See CFM80100 for more on the loan relationships rules in periods beginning before 1 January 2005.

FA96/S85(2)(b) requires the accounting method used to make proper provision for determining exchange gains and losses. FA96/S85(2)(a) states that the accounts should follow normal accounting practice.

Prior to 1 January 2005, normal UK GAAP accountancy practice for foreign currency translation was set out in SSAP20, which allows the company to use the following rates, depending on the circumstances:

  • Spot rate. For example for interest payments in foreign currency, the company would normally use the spot rate on the date of the transaction. The spot rate on the accounting date is generally used to translate monetary balance sheet items (except where a contracted rate is adopted for trading transactions). The spot rate is the mean of the buying and selling rates at the close of business on the day for which the rate is to be ascertained.
  • Rate implied in the contract. For example a foreign currency loan for the purposes of the trade that is hedged by a currency contract may be translated at the exchange rate in that contract.
  • Average rate. For example for transactions, but only if rates have not fluctuated significantly during the accounting period.

An accruals basis is not normally an authorised method under loan relationships if it produced debits from the valuation of a loan relationship other than under authorised arrangements for bad debt. FA96/S85 (2)(c) ensures that the fact that a method produces exchange losses from the valuation of loan relationships will not prevent an accruals method from being an authorised method.

Where there is a choice of accounting treatment, you should accept the accounting treatment used unless one of the forex anti-avoidance rules (CFM38500) applies.

Some companies do not use SSAP20. Certain small companies may adopt the Financial Reporting Standard for Smaller Entities (FRSSE). FRSSE does contain a simplified version of the rules for handling foreign exchange gains and losses in SSAP20 and can be expected to produce a result that complies with FA96/S85 (2)(bb).

Unauthorised accounting methods

Some companies may not use SSAP20 or the FRSSE.

In these cases the company still has to use an accounting method that makes proper provision for determining exchange gains and losses from loan relationships under FA96/S85(2)(bb).

Where an accounting method is used that is neither approved by SSAP20 or the FRSSE, FA96/S86(3) may apply. If the method of accounting for a loan relationship equates with an authorised accounting method the company should make adjustments in its computation to match the result given by that authorised method.

If the company does not use an authorised method of accounting for its loan relationships or a method that equates with an authorised method, the company must make adjustments in its computation to match the result given by an authorised accruals basis (FA96/S86 (4)).