CFM64170 | Foreign exchange: accounts drawn up in a foreign currency: exchange rate to be used on translation

Exchange rate used to translate profit or loss into sterling

CTA10/S11 governs the exchange rate used to translate the CT profit or loss in CTA10/S7,S8 and S9. In line with IAS 21 (and FRS 23), the rate is

• the average exchange rate for the accounting period in question, or

• the spot rate for each transaction.

The most accurate result will be found by translating each transaction in the accounting period on a strict transaction by transaction basis. Commonly the average rate will be used if it provides a good approximation. Where, however, transactions are affected by seasonal variations the translation should be done on a strict transaction by transaction basis or an appropriate weighted average basis. The method adopted should be applied consistently from year to year.

Where necessary, HMRC staff should seek advice from their accountant on appropriate weighted averages.

Repeal of rule on translating foreign currency transactions

There is no longer a general rule for translating currency equivalents. The previous rule (in FA93/S94AA - CFM86100) provided that an arm’s length exchange rate must be used in translating foreign currency amounts into another currency in the accounts. This was an entirely separate matter from the translation of a foreign currency profit into sterling because it related to every day currency transactions, for example, where a company with sterling accounts makes a sale of stock in Euros. It is no longer needed because IAS 21 sets out rules for companies on the exchange rate to be used in these circumstances. Transactions in a foreign currency must be translated into the company’s functional currency at the spot rate on initial recognition. Where there are numerous transactions, an average rate for a week or month may be used provided rates do not fluctuate significantly during that period.