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HMRC internal manual

General Insurance Manual

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Taxation of general insurance: annual accounting: currency accounting: general rules: APs beginning on or after 1 January 2005

The rules in FA 1993 were amended in FA 2004 for accounting periods beginning on or after 1 January 2005. FA04/SCH10 substituted a new series of sections into FA 1993, replacing sections 92 to 94AB. The new legislation was introduced as part of a package of changes dealing with the consequences of the implementation of International Financial Reporting Standards (IFRS). The relevant standard is IAS 21 which differs from SSAP 20 in a number of respects. SSAP 20 is also replaced by a new UK standard FRS 23 based on IAS 21 - but this only applies to companies using FRS 26, the revised UK standard on recognition and measurement of financial instruments.

The revised legislation is set out in new sections 92 to 92E FA 1993. It reflects the distinction made in IFRS between the ‘presentation’ currency, meaning broadly the currency in which the accounts are drawn up, and the ‘functional’ currency, meaning the currency of the primary economic environment in which the entity operates. Functional currency is defined in FA93/S92E (3). Unlike the FA 2002 legislation it does not draw a distinction between the accounts as a whole and the branch accounts.

The basic rule remains that profits must be computed in sterling (FA93/S92 (1)). The legislation then provides rules for three other cases.

Company operating in sterling and preparing accounts in another currency - section 92A FA 1993

This applies to a UK resident company that uses sterling as its functional currency and prepares accounts in another currency - for example, a company carrying on its business in the UK but drawing up its accounts in US dollars. It must prepare its computations as if the accounts were drawn up in sterling.

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Company operating in currency other than sterling and preparing accounts in another currency - section 92B FA 1993

This applies to a UK company that uses a currency other than sterling as its functional currency and prepares accounts in a third currency - for example, a UK based company that carries on its business in another country and draws up accounts in US dollars. It must prepare its computations in the functional currency and translate the taxable profit or loss into sterling.

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Company preparing accounts in currency other than sterling - section 92C FA 1993

This applies to a UK resident company where neither FA93/S92A nor FA93/S92B applies. In general this will be where the presentation currency and the functional currency are the same foreign currency. It also applies to non-resident companies that prepare accounts in a currency other than sterling. It is the equivalent of the former FA93/S93, and requires the computations to be prepared in the foreign currency and the result translated into sterling.

For the purposes of FA93/S92B and FA93/S92C, FA93/S92D provides that amounts must be translated into sterling using either the average exchange rate for the accounting period or the appropriate spot rate for the transaction. This is different from the previous rule which required the use of the closing rate/net investment method, and is consistent with IAS 21.