CFM61080 - Foreign exchange: tax rules on exchange gains and losses: loan relationships and derivative contracts: example

Example of exchange differences on a loan relationships

Satas Ltd has placed $200,000 in a US$ account. It is worth £156,000 at the beginning of the AP and £147,000 at the end of the AP. Translation of the US$ account is required at both accounting dates. The exchange loss of £9,000 is treated as a loan relationship debit for the year.

During the year interest of $1,500 arises each quarter. The interest is translated into sterling at the date it arises and again when it is either

• paid, or
• accrued on the balance sheet at the end of the year.

If the exchange rate changes from one of these valuation times to another a gain or loss will arise on the interest credit.

The exchange rate at the accounting date on the accrual is £1 = $1.425. The rate at the date of payment has moved to £1= $1.520. The amount payable in the accounts was therefore £1,052 but the amount paid was only £988. The difference of £64 is an exchange loss and is a loan relationship debit for the year.