CFM8031 – Accounting for foreign exchange: hedging in the consolidated accounts
Hedging
An individual company may hedge an investment in an overseas
enterprise with a loan or a currency contract. The company can take
exchange differences on the hedging loan or contract to reserves
and offset them against exchange differences on the investment
– see
CFM8011.
Groups can apply a similar offset in consolidated accounts,
where the closing rate/net investment method is used to translate
the results of a subsidiary. Exchange differences arising on
translation of the parent company’s net investment in the
subsidiary are taken to reserves (see
CFM8026). But the group may have
borrowings that hedge that net investment. Since, in economic
terms, the group is hedged against movements in exchange rates, it
is reasonable for exchange differences arising on the borrowing to
be offset in reserves – and SSAP20 allows this to be done.
The borrowing can be by any group company, not just the immediate
parent company of the overseas subsidiary.
The conditions for the use of this offset method are very
like those that apply at the single company stage (
CFM8012):
- exchange differences on the foreign currency borrowings can be offset only to the extent of the exchange differences arising on the net investments in foreign enterprises during the period;
- the foreign currency borrowings must not exceed the total amount of cash that the net investments are expected to generate; and
- the method must be applied consistently from one accounting period to the next.
In addition:
- the relationships between the parent company and the foreign subsidiaries must justify the use of the closing rate/net investment method.
