CFM61060 | Foreign exchange: tax rules on exchange gains and losses: loan relationships and derivative contracts: exchange rate to be used

The sterling equivalent

Periods beginning before 1 January 2005

For periods beginning before 1 January 2005, FA93/S94AA laid down rules for ascertaining the sterling equivalent of foreign currency amounts for CT purposes generally. See CFM64000.

Periods beginning on or after 1 January 2005

CTA09/S307(2) requires a company to determine loan relationships profits and losses according to GAAP. The corresponding requirement for derivative contracts is at CTA09/S696(2). The company’s choice of exchange rate for foreign currency translations must, therefore, accord with the appropriate accounting standard.

FRS 23, New UK GAAP and IAS 21 direct that a foreign currency transaction must, on initial recognition, be translated into the company’s functional currency at the spot rate for the date of the transaction. Where appropriate, a rate that approximates to the spot rate may be used (for example, an average rate for the week or month may be used for all transactions taking place during that period). At each balance sheet date, monetary items are translated into the functional currency at the closing rate.

SSAP 20 requires that where a settlement is to occur at a contract rate that rate must be used and if a trading transaction is covered by a related or matching forward contract, the rate of exchange specified in the contract may be used.

Companies may use any reliable source of daily spot rates and of monthly or yearly average rates in the preparation of their accounts. These rates are acceptable for tax purposes. HMRC staff should consult an HMRC Compliance Accountant if spot exchange rates used in a company’s accounts or tax computations appear to diverge markedly from the London closing rate or if data sources are used inconsistently.

For gains and losses which do not fall to be treated under the loan relationships or derivative contracts rules, FA 1993/S92D sets out the exchange rate to be used, which is the average exchange rate for the current accounting period or an appropriate spot rate of exchange for the date of the transaction.