CTM76070 - Local currency accounting (FA00 scheme): rate to be used
It is worth emphasising again that these rules are merely intended to codify the guidance in SSAP20 ( CTM76160). Normally, if SSAP 20 is applied in producing the accounts, then the results will be acceptable for tax purposes.
CTM76075 displays the following text as a chart.
Rate where FA93/S92 applies (i.e. where accounts drawn up in sterling)
FA93/S94 (1)(2) provides that receipts or expenses denominated in a local currency are to be translated into sterling either at:
- the rate used in drawing up the accounts as a whole,
i) if it is an arm’s length exchange rate for the relevant day ( CTM76073),
or
ii) if it is an average arm’s length exchange rate for a period ending on the relevant day or for a period of not more than three months including that day and the rate does not vary significantly from day to day. (If the company had made an average rate election under the previous regulations, it will need to make a fresh election under the new regime.)
or
- if these do not apply, then the company must use the London closing exchange rate for the day it became entitled to the receipt or incurred the expense (the relevant day) (this rule reflects paragraph 46 of SSAP20).
Rate where FA93/S93 applies (i.e. currency other than sterling used)
With two exceptions, use the London closing exchange rate for
the last day of the accounting period to find the sterling
equivalent of the profit or loss as expressed in the relevant
currency. (For the exchange rate to be used in arriving at that
relevant currency measure where it has been necessary to translate
another currency into that currency, see
CTM76071 below.)
The exceptions are:
- Where a company draws up its accounts as a whole in a local currency, or it is non– resident and uses a currency other than sterling to draw up its UK branch accounts, it may elect to use an average arms length rate instead of the London closing exchange rate, (FA93/S94 (5)(a)).
- The average rate election must be made during the accounting period for which it is first to apply.
- It can be withdrawn by notice with effect from the first day of the next accounting period beginning after the withdrawal notice.
- Any fresh election cannot be made for a further three periods. This is to prevent a company from chopping and changing to obtain the best tax result each year.
- Where a company draws up its accounts in sterling, but a currency other than sterling is used for preparing the financial statements from which the accounts are drawn up using the closing rate/net investment method (Section 93(3)), and that rate is an average rate, that same rate must be used to find the sterling equivalent, (Section 94(7)).
