CFM9428 - Taxing forex: matching under Disregard Regulations: meaning of net asset value - examples

Examples of ascertaining the net asset value underlying shares

This guidance applies to periods of account beginning on or after 1 January 2008

In all of these examples, X Ltd (the taxpayer company) is a UK company holding 100% of the shares in a US subsidiary, company A. The functional and reporting currency of X is sterling. Company A is a pure holding company, having no assets or liabilities apart from shares in subsidiaries. The “relevant currency” is the US dollar. Group accounts are prepared by P, the ultimate parent company of the group.

Example 1

Company A has two 100% subsdiaries, E and F. E is a US company, holding business premises, trading stock, trade debtors and creditors, and a loan from X Ltd, all denominated in dollars. F is a French company, all of whose assets and liabilities are denominated in euros.

For “forex matching” purposes, the assets and liabilities with which we are concerned are the dollar-denominated assets and liabilities of company E. The euro-denominated assets and liabilities held by F do not enter into the equation (but see the note at the end of this example). The ultimate parent company of the group, P, prepares consolidated accounts. The values placed on the assets and liabilities of E in these consolidated accounts are as follows:

However, E also has a loan of $6 million from X Ltd. This intra-group loan is eliminated in preparation of the group accounts, but would feature in consolidated accounts prepared by company A. This loan is also taken into account.

The net asset value is therefore $9.1 million ($12 million + $3.3 million + $2.8 million - $3 million - $6 million). So if X Ltd – the taxpayer company which is matching the shares in A - has a liability of $8 million, it can be regarded as fully matched.

(In practice, it is unlikely that X Ltd would want to match $8 million. It has an asset of $6 million – the loan to E – that already matches $6 million of the liability. It is probable that X Ltd would regard only $2 million of the liability as hedging the shareholding in A).

Note: this example assumes that the net investment in the Euro foreign operation represented by F is not being hedged into dollars, either by A or by X Ltd. If the exchange risk arising from fluctuations in the Euro/dollar exchange rate were hedged, F would become a US dollar foreign operation, and its assets and liabilities would be regarded as denominated in US dollars.

Example 2

The facts are as in example 1, except that E markets a branded product that it developed many years ago. The brand name is not included as an asset in E’s accounts, and would not be shown as an asset in consolidated accounts prepared by P. Although the brand name is an asset held by a subsidiary of A, it is arguable whether it can be described as denominated in US dollars, since it is off balance sheet. In any case, no value is put on it in the group’s accounts. It therefore does not enter into the computation of net asset value.

Example 3

The facts are as in example 1 except that company E developed the branded product before it was acquired by the P group of companies. Although no carrying value is attributed to the brand name in the single entity accounts of company E, the shares of company E were acquired for an amount exceeding the net value of E’s balance sheet. In the consolidated accounts prepared by the parent company P, part of the acquisition cost of the company is carried as an intangible (purchased goodwill) in the consolidated accounts of company P. In this case the intangible will be included in the net assets underlying the investment in A, and will be accorded a value equal to its carrying value in the consolidated accounts.