CFM10565 - Accounts in a currency other than sterling: use of presentation currency

Company accounts prepared using a presentation currency that is not the functional currency

A company may prepare its accounts in a presentation currency other than its functional currency where

• its functional currency is sterling, or
• its functional currency is a currency other than sterling.

FA93/S92A

This section applies where the functional currency is sterling but a presentation currency other than sterling is used. In this case, the tax rules override what is in the accounts, and profits and losses must be computed by reference to sterling. In computing profits and losses by reference to sterling the company is required to use generally accepted accounting practice by FA98/S42. The company is required to calculate profits and losses as if it had prepared accounts in sterling.

Example

Tychpin Ltd prepares accounts in Euros because it is consolidated with a parent preparing accounts in Euros. However, the primary economic environment for Tychpin Ltd is the UK and sterling is its functional currency. Tychpin therefore identifies sterling as its functional currency in its accounts. FA93/S92A applies and Tychpin must calculate its profit or loss by reference to sterling for UK tax purposes.

Suppose, for example, the accounting records of Tychpin Ltd show profits of £1,500,000, measured in its functional currency of sterling. These profits will include any exchange gains or losses that arise on Euro-denominated assets, liabilities or transactions. In preparing its accounts, it will translate that £1,500,000 profit into Euros (either at the spot rate applicable to each transaction, or at an average rate for the year where that provides a reasonable approximation). But its tax computations will need to start from the sterling profit of £1,500,000, and computational adjustments, capital allowances and so on will be computed in sterling terms.

FA93/S92B

This section applies where one currency other than sterling is the functional currency (as identified by the company in its accounts) and another currency is used to prepare the accounts.

The company must compute its CT profits or losses by reference to its functional currency. The profit or loss is then translated into sterling for tax purposes. For the rate to be used see CFM10590.

Exchange differences arising on translation

Where a company translates profits from its functional currency into its presentation currency, exchange differences will arise (and will normally be taken to reserves) – see CFM8026a and CFM8026b for more detail. These exchange differences are ignored in calculating the profit or loss that arises when the profit is computed as if the company had prepared accounts in its functional currency (FA1993/S92A (2) or S92B (2) as appropriate). The tax computations must be based on deemed functional currency accounts, which would not show any such exchange differences.