This guidance describes the post-FA 2002 taxation of loan
relationships, derivative contracts and FOREX.
Lubtyth Ltd prepares accounts, in sterling, to 31 March
2005.
| A. | It has a $100,000 bank
loan which, in accordance with SSAP20, it translates into sterling
at 31 March 2005, using a published dollar/sterling exchange rate
for that day.
This is an arm's length exchange rate for the relevant day. It will use the same exchange rate to work out loan relationship credits or debits arising from exchange profits or losses on the loan. |
| B. | Throughout the year, it
makes sales to customers in US dollars, euros and Japanese yen, as
well as in sterling. The company's accounting policy is to
translate all such sales at the average exchange rate for the month
in which they are invoiced.
Again, this is an arm's length rate; no adjustment to the accounts figures is needed for tax purposes. |
| C. | Some years previously, it
issued US dollar denominated loan notes, which it hedges by means
of a US dollar/sterling currency swap. It accounts for the loan
notes at the rate implied by the swap contract, so that no exchange
gains or losses on the loan notes, or on the swap, appear in the
accounts.
This, too, constitutes an arm's length rate: no computational adjustments are needed. |
| D. | The company buys a
machine, on which it claims capital allowances, from an Italian
supplier for €128;50,000. It records the purchase at the
invoice date, 15 September 2004, using a published euro/sterling
exchange rate for that day. For capital allowance purposes,
however, the company is treated as incurring the expenditure on the
date on which the obligation to pay becomes unconditional - this is
3 October 2004, when the machine is delivered. It must translate
its qualifying expenditure into sterling at the exchange rate for
that day (see CA11750). But in its accounts, the company has not
translated €128;50,000 on 3 October - it has no need to - so
it's not possible to use the rate that is in the accounts.
The London closing rate for 3 October 2004 is used instead. * |
