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HMRC internal manual

Corporate Finance Manual

Old rules: forex and accounts drawn up in a foreign currency: pre 2005: accounts wholly in a foreign currency: requirement to use an arm’s length exchange rate

Exchange rate used to compute sterling profit

This guidance applies for accounting periods between 1 October 2002 and 1 January 2005

A company (including a UK branch of a non-resident company) that prepares accounts in a non- sterling currency must follow the rules outlined in CFM86200 to arrive at a sterling profit figure. In this process, it will have to translate its overall profit or loss, expressed in the foreign currency, into sterling. It may also have to calculate the foreign currency equivalent of fixed sterling amounts in the Taxes Act (see CFM64000).

FA93/S94AB sets out the rule for the exchange rate to be used in this case. It is an arm’s length exchange rate for the appropriate day. This means the rate for the day that would have been used if the company accounts were translated into sterling in accordance with UK GAAP.

If a company maintaining accounts in a non-sterling currency is part of a group that accounts in sterling, the subsidiary’s accounts must be translated into sterling in order to be consolidated into the group accounts. SSAP20 governs how this should be done. The subsidiary company’s profit and loss account will normally be translated at either the closing rate (the spot rate for the last day of the accounting period) or an average rate for the period.

Where there is, as part of a consolidation process

  • an actual translation of a company’s results into sterling, and
  • the profit and loss account is translated at a particular exchange rate

the company should use the same exchange rate to translate its CT profits or losses from foreign currency to sterling. Nothing in the statutory definition of appropriate day prevents an average rate being used for this purpose.

Where there is no such actual translation, the company should use the exchange rate that would be appropriate, in accountancy terms, if such a translation were to take place. HMRC staff should not normally need to query the company’s choice of a rate, provided that it is an arm’s length rate and is applied consistently.