CFM7007 - Understanding foreign exchange: introduction

Links with other guidance

For accounting periods beginning on or after 1 October 2002:

• Exchange differences reflected in a company's accounts that arise on a loan relationship are in general dealt with under the loan relationship regime. You will therefore need to understand how loan relationships are taxed. The relevant guidance is at CFM5000onwards.
• Exchange differences reflected in a company's accounts that arise on currency contracts are taxed under the derivative contract regime. CFM11020+ explains generally what derivative contracts are, and CFM11200+ explains how companies use currency futures, options and swaps to hedge foreign exchange risk. CFM13500+ describes the tax treatment of derivative contracts, including currency contracts.
• FA 2002 introduced an amendment to the financial instrument legislation in FA 1994 to change the way in which it deals with forward premiums and discounts on currency contracts. This applies for accounting periods ending on or after 26 July 2001, but is replaced by the new rules for periods beginning on or after 1 October 2002. This change is explained at CFM13006.

Accounting periods beginning before 1 October 2002

If you are dealing with an accounting period beginning before 1 October 2002 (but after 25 March 1995), you will need to look at the FOREX tax regime set out in FA 1993. This is described in the Corporation Tax Manual, beginning at CT13200.

Currency accounting

The local currency rules for companies drawing up accounts in a currency other than sterling were substantially altered by FA 2000. There are therefore three separate sets of rules applying to such companies:

* There is one exception - the 'old' local currency rules apply to any short accounting period beginning after 31 December 1999 and ending on or before 31 March 2000.

FOREX and individuals

The guidance on exchange differences in the Corporate Finance Manual applies only to companies. If you come across exchange differences in the accounts of individual traders, or partnerships which do not involve companies, you should look at BIM39500+ and Statement of Practice 1/87.