CFM10506 - Currency transactions and accounting: currency transactions

Currency transactions in a company’s accounts

This guidance describes the post-FA 2002 taxation of loan relationships, derivative contracts and FOREX.

Many of the entries in a company's Corporation Tax (CT) return, particularly its trading profit, will be taken (with some computational adjustments required by tax law) from its accounts drawn up in accordance with UK Generally Accepted Accounting Practice (GAAP). In the great majority of cases, these accounts will be in sterling.

FA93/S92 put beyond doubt what has always been considered to be the case - that CT profits are computed and expressed in sterling. When enacted, S92 applied specifically to trading profits, but following modification by FA00/S105 it now applies to the profits and losses of the business of a company. This includes almost all of the activities that a company may carry on.

Increasing numbers of companies, both small and large, enter into transactions involving foreign currency. When a company imports goods or equipment from overseas or makes export sales, it is involved in foreign currency transactions. If it forms a subsidiary or makes an investment in another country, it may have assets denominated in a non-sterling currency and receive income in that currency.

As soon as a company enters into transactions of this sort it has to consider how to account for them in the books and records which it keeps in sterling. The kinds of questions it faces are:

• At what rate of exchange should it translate a foreign currency receipt or expense?
• How should it translate foreign currency assets or liabilities?
• How should the exchange gains and losses that arise from the translation be reflected in its accounts?
• If it has a branch keeping books and preparing financial statements in a foreign currency, how should the results of the branch's business operations be incorporated into the company's accounts?

For companies subject to UK GAAP the answers to these questions are (at present) found in Statement of Standard Accounting Practice (SSAP) 20. This is covered in the chapter on Accounting for FOREX, CFM8000+.

But the company faces further issues in preparing its CT return.

• What exchange rate or rates should it use to translate, for tax purposes, its foreign currency receipts, expenses, assets, liabilities or derivative contracts? The rule here is given by FA93/S94AA(1) and (4). CFM10511 deals with this in more detail.
• How should it bring into account its exchange gains and losses? This is covered in the guidance at CFM9200+.
• How should it incorporate the results of foreign branches into its CT profits? The relevant legislation is at FA93/S93A, and is covered at CFM10513+.