CFM10575 - Accounts in a currency other than sterling: results of part of a business in foreign currency

Translation of accounts for part of a business into the presentation currency

There are no longer explicit rules for the translation of part of a business where previously FA1993/S93A applied ( CFM10513). That rule, in any case, followed the normal accounting treatment.

These rules applied where

• a company accounted in one currency but its results incorporated the results of part of its business carried on in a different currency, or
• the UK permanent establishment of a non-resident company prepared its return of accounts in one currency using financial statements prepared in a different currency.

Usually in these cases, the company kept part of its books in one currency and consolidated the results into its accounts (prepared in another currency) using the closing rate/net investment method. The tax rules at FA93/S93A essentially incorporated these accounting rules in legislation for the avoidance of doubt ( CFM15103).

Under IAS 21 (or FRS 23), where a company has a branch operating in a different functional currency, the results of that branch are translated into the reporting entity’s presentation currency. The balance sheet of the foreign currency branch is also re-translated each year. Any exchange differences arising on the re-translation will be taken to the statement of changes in equity and disregarded for tax purposes by FA96/S84A (3)(b).

Example

Kanweb Ltd is a company operating in the UK that keeps books in different currencies for various discrete parts of its business. Its functional currency is the Euro but it also keeps a US dollar book and a Swiss Franc book. Accounts for the entity as a whole are prepared in Euros. The accounting date is 31 December. The company has adopted IAS 21. In accounting period ended 31 December 2006 there are the following results

The Euro accounts show a profit before adjustments of €1.98m made up as follows: -

There is disallowable expenditure of $75,000 in the US dollar book and capital allowances of SFr 25,000 on the Swiss Franc book. There are also capital allowances on the main business of €80,000.

As the entity as a whole has a functional currency of Euros and accounts in that currency, FA93/S92C applies. The profit is therefore calculated for tax purposes in Euros and then translated into sterling.

The company should therefore take the US dollar result and the Swiss Franc result, adjust for any unallowable expenditure, deduct capital allowances and then translate it into Euros for tax purposes. As follows

The second category is covered by FA1993/S92C if the return of accounts is made in a currency other than sterling ( CFM10570). If, on the other hand the return is in sterling, those figures are used for tax purposes in accordance with FA93/S92 provided they are prepared in line with generally accepted accounting practice.