This guidance applies for accounting periods beginning on
or after 1 January 2005
IAS 21 is the International Accounting Standard on Foreign
Exchange replacing SSAP20. It was implicit in SSAP20 that a company
would draw up accounts in its local currency, but IAS 21 permits a
company to use any currency to prepare its accounts even where it
is not the functional currency. FRS 23 implements IAS21 in the UK.
SSAP20 remains in force for companies that do not adopt IAS21 or
FRS 23. Two currencies are defined for the purposes of IAS 21 and
FRS 23.
This is defined for tax purposes at FA93/S92E (3). The
functional currency is the currency of the primary economic
environment in which the company operates. This may be sterling or
another currency.
IAS 21/FRS 23 sets out a number of objective indicators for
determining a company’s functional currency, such as the
currency that influences the price for which goods and services are
sold, and the currency that influences its costs of labour and
other expenses. Where the indicators give mixed results, the
management of the company must make a judgement.
In many cases, the company’s functional currency will
be the same as the “local currency” that it had under
SSAP 20. However, in some more complex groups, the functional
currency of an intermediate holding company, for example, may under
IAS 21 and FRS 23, be influenced by the functional currency of its
parent. In some cases this may make it more difficult to determine
the functional currency of a company in circumstances where the
company would have a different functional currency when viewed in
isolation. This may, in practice, lead to a change of functional
currency for accounting and therefore tax purposes.
Under IAS 21 or FRS 23 a company can present its financial statements in any currency. The currency in which the financial statements are prepared is known as the presentation currency. Where the functional currency differs from the presentation currency, the functional currency must be disclosed in the accounts. The general tax rule is that whatever the presentation currency, CT profits or losses must be calculated by reference to the functional currency. The term presentation currency is not used in the legislation – instead the rules refer to the currency in which the accounts are prepared.
