CFM26020 - Accounting for corporate finance: foreign exchange: accounts not kept in sterling

Non-sterling accounts

SSAP20 does not just provide a standard for foreign currency translation in an individual company’s accounts (see CFM26010). It also addresses a second problem. As well as (or instead of) undertaking foreign currency transactions on its own behalf, a company may invest in an enterprise that operates, and keeps its financial records, in a foreign currency.

One of the most common ways a company can invest in a foreign entity is to hold shares in an overseas subsidiary. If the subsidiary accounts in a foreign currency whilst the consolidated group financial statements are prepared in sterling, it will be necessary to translate the assets and liabilities in the subsidiary’s balance sheet, and its profit and loss account, into sterling before its results can be incorporated into the consolidated accounts.

SSAP20 sets out how this should be done. This is covered in more detail at CFM26200 onwards.

A company may also have one or more branches that keep financial records, and draw up financial statements, in a foreign currency. The company will need to translate the branch results into sterling in order to incorporate them into its individual company accounts. This is almost precisely the same problem as translating the accounts of a foreign subsidiary, and is also dealt with by SSAP20. This is covered in more detail at CFM26210 

‘Foreign branch’ tends to conjure up a picture of an office or factory located in an overseas territory, conducting its own operations with its own staff. But SSAP20 defines branch more widely than this. For example, a shipping company might account for an individual ship, and all the receipts and expenses associated with that ship, as a branch, where the ‘part business’ represented by the ship operates in a foreign currency.