CFM86120 | Old rules: forex and accounts drawn up in a foreign currency: pre 2005: transactions in foreign currencies

Exchange rate to be used

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

A company that accounts in sterling must compute its corporation tax profits and losses in sterling (FA93/S92(1)). In order to do that, it must translate

• any receipts or expenses in foreign currencies, and

• the value of any assets, liabilities and derivative contracts denominated in foreign currencies

into sterling. It doesn’t, of course, have to make such translations solely for tax purposes - translating foreign currency transactions, assets and liabilities into sterling is an integral part of preparing the company accounts.

FA93/S94AA(4) says that for tax purposes you use whatever exchange rate the company has used in its accounts, provided that it is an arm’s length rate for the ‘relevant day’.

Arm’s length rate means an exchange rate that might reasonably be agreed between people dealing at arm’s length. It does not have to be the published spot rate for the day. If the company does not use an arm’s length rate in its accounts, the London closing rate is used instead.

‘Relevant day’ means the day on which the translation falls to be made. If the company, in preparing its accounts, uses an average rate for a number of days, each of these days is a relevant day. And FA93/S94AA (5) makes it clear that, if the company has used the rate implied by a currency contract to value an asset or liability, that implied rate is also an arm’s length rate.

There is an example at CFM86130.