CTM76610 - Exchange differences: matching: liability becoming matched during accrual period
Where there is major change in the extent to which a liability is matched with an asset during an accrual period and there is a significant change in exchange rates in that period then Regulation 5(3)(c) SI1994/3227 provides that the time of that change is treated as a translation time as regards that liability. This enables tax treatment to mirror accounting treatment.
Example
A company with a 30 June accounting date borrows $500,000 on 1
September 1996 when $500,000 = £300,000. On 1 January 1997 the
company acquires a $500,000 holding of shares in an overseas
subsidiary and makes a matching election to apply from that date.
At 1 January 1997 $500,000 = £350,000. At 30 June 1997
$500,000 = £280,000.
Under the normal accounting rules (ignoring matching) an
exchange gain of £20,000 accrues on the liability
(£300,000 at 1 September 1996 less £280,000 at 30 June
1997). Applying the alternative method of calculation would involve
accruing the gain evenly over the period and leaving out the amount
relating to the period from 1 January 1997 to 30 June 1997 when the
loan was matched. The net result would be:
- a net gain of 4/10 x £20,000 = £8,000, and
- a matched gain of 6/10 x £20,000 = £12,000.
However, to mirror the accounting treatment, 1 January 1997 is
treated under Regulation 5(3) as a translation time. An exchange
loss of £50,000 accrues on the loan for the accrual period
from 1 September 1996 to 1 January 1997. An exchange gain of
£70,000 accrues on the loan for the accrual period from 1
January 1997 to 30 June 1997.
As the matching election covers the period from 1 January
1997 to 30 June 1997 the exchange gain of £70,000 is reduced
to nil. The exchange loss of £50,000, which accrued when the
liability was not matched, is unaffected.
Inspectors should look critically at cases where a
computational adjustment is made on the basis of the alternative
method of calculation that does not reflect accounting
treatment.
