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HMRC internal manual

General Insurance Manual

Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: General Insurance Reserves (Tax) Regulations: currency accounting: amendments to FA 1993 rules made in Finance Act 2004

Regulation 5: accounting in foreign currencies for periods ending on or after 21 December 2005

Part 4 of Schedule 10 to Finance Act 2004 replaced FA93/S92 to FA1993/S94AB with new sections 92 to 92E. This change reflected a new accounting standard FRS23 (IAS21) which made the existing standard on foreign currency accounting (SSAP20) obsolescent.

The pre-Finance Act 2004 FA93 rules set out what to do where a company had a branch (which included a collection of assets), but there was no equivalent in the post FA2004 rules. Those rules tolerated only one functional currency, although FRS23 allowed for a separate part of the business to have its own functional currency distinct from the functional currency of the main business.

The amended regulation 5 followed the new FA93 currency accounting rules, but accommodated branches and had a continuity clause as described below. It applied to accounting periods ending on or after 21 December 2005.

New regulation 5

The main rule remained Rule 1 of regulation 3: that the calculations should be carried out in sterling subject to regulation 5. This therefore deals with the FA93/S92 and the FA93/S92A circumstances.

New regulation 5(1) said that where FA93/S92B applied the calculations should be carried out in the functional currency. This meant that, where an insurer operated in a currency other than sterling and prepared its accounts in a second foreign currency, the calculations would be carried out in the currency in which the business was conducted.

New regulation 5(2) says that where FA93/S92C applies the calculations should be carried out in the accounts currency.

FA93/S92C applied both to UK resident and non-UK resident insurers operating in the UK where the accounts were not prepared in sterling.

For UK resident insurers, FA93/S92C only applied if FA93/S92A and FA93/S92B did not apply. This meant that the functional currency would be the same foreign currency as the accounts currency. (This must be so because if the functional currency were sterling, FA93/S92A would apply and if it were a different foreign currency FA93/S92B would apply.) Regulation 5(2) therefore would also result in the calculation being carried out in the currency in which the business was conducted.

Non-UK resident insurers operating in the UK through a permanent establishment would not fall under new regulation 5(2). Instead they would fall under new regulation 5(3).

New Regulation 5(3) applied where an insurer had a ‘foreign operation’. New regulation 5(6) defined it in two ways

  • for non-UK resident insurers, a foreign operation was its permanent establishment in the UK
  • for UK resident insurers, the definition was drawn from FRS23. In brief it meant a part of the business that has its own functional currency distinct from the ‘main’ functional currency of the business.

Note that ‘foreign’ in this context meant that the operation was distinct from the insurer’s main business. It did not mean ‘non-UK’ nor did it necessarily mean that the operation was in a different territory to the main business.

In both cases, new regulation 5(3) required the calculations to be carried out in the currency in which the business of the foreign operation was conducted.

New regulation 5(4) made clear how any amount found by the calculation should be translated into the currency in which the profits were to be computed, that is, at the exchange rate found by FA93/S92D (2).

New regulation 5(5) repeated old regulation 5(5) in relation to the currency of the discount rate to be applied to the calculations.

New regulation 5(6) defined

  • ‘accounts currency’ as in FA93/S92C (1) and (2)
  • ‘appropriate exchange’ rate as in FA93/S92D (2)
  • ‘foreign operation’ as above
  • ‘functional currency’ as in FA93/S92E (3).

Continuity clauses

The amending regulations also had two continuity clauses.

The first of these repeated the clause in SI2003/2862. That instrument abolished currency elections, but allowed an existing election to continue to have effect.

The second continuity clause allowed insurers already making calculations in a foreign currency to continue to use that currency if SI2005/3289 (the 2005 amendments) would otherwise force them to change. The clause meant that any calculations for (say) 2003 and 2004 could continue unchanged in 2005 and beyond. Any new calculations - even if for the same part of the business - should, however, be carried out in the currency determined by the new regulation 5.

Controlled Foreign Companies (CFCs)

ICTA88/S747A was repealed by FA05/SCH4/PARA24. This meant that no special rules were required for CFCs and they could be treated in the same way as UK resident companies.