GIM6370 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: currency accounting: amendments to FA 1993 rules made in Finance Act 2004

Regulation 5: accounting in foreign currencies for periods ending on / after 21 December 2005

Part 4 of Schedule 10 of Finance Act 2004 replaced FA93/S92 to FA1993/S94AB with new sections 92 to 92E. This change reflected a new accounting standard FRS23 (IAS21) which made the existing standard on foreign currency accounting (SSAP20) obsolescent.

The pre-Finance Act 2004 FA93 rules set out what to do where a company had a branch (which included a collection of assets), but there was no equivalent in the post FA2004 rules. Those rules tolerated only one functional currency, although FRS23 allows for a separate part of the business to have its own functional currency distinct from the functional currency of the main business.

The amended Regulation 5 follows the new FA93 currency accounting rules, but accommodates branches and has a continuity clause as described below. It applied to accounting periods ending on / after 21 December 2005.

New Regulation 5

The main rule remains Rule 1 of Regulation 3: that the calculations shall be carried out in sterling subject to Regulation 5. This therefore deals with the FA93/S92 and the FA93/S92A circumstances.

New Regulation 5(1) says that where FA93/S92B applies the calculations shall be carried out in the functional currency. This means that, where an insurer operates in a currency other than sterling and prepares its accounts in a second foreign currency, the calculations will be carried out in the currency in which the business was conducted.

New Regulation 5(2) says that where FA93/S92C applies the calculations shall be carried out in the accounts currency.

FA93/S92C applies both to UK resident and non-UK resident insurers operating in the UK where the accounts are not prepared in sterling.

For UK resident insurers, FA93/S92C only apply if FA93/S92A and FA93/S92B do not apply. This means that the functional currency will be the same foreign currency as the accounts currency. [This must be so because if the functional currency were sterling, FA93/S92A would apply and if it were a different foreign currency FA93/S92B would apply.] Regulation 5(2) therefore will also result in the calculation being carried out in the currency in which the business was conducted.

Non-UK resident insurers operating in the UK through a permanent establishment will not fall under new Regulation 5(2). Instead they will fall under new Regulation 5(3).

New Regulation 5(3) applies where an insurer has a “foreign operation”. New Regulation 5(6) defines it in two ways

• for non-UK resident insurers, a foreign operation is its permanent establishment in the UK
• for UK resident insurers, the definition is drawn from FRS23. In brief it means a part of the business that has its own functional currency distinct from the ‘main’ functional currency of the business.

Note that ‘foreign’ in this context means that the operation is distinct from the insurer’s main business. It does not mean “non-UK” nor does it necessarily mean that the operation is in a different territory to the main business.

In both cases, new Regulation 5(3) requires the calculations to be carried out in the currency in which the business of the foreign operation was conducted.

New Regulation 5(4) makes clear how any amount found by the calculation shall be translated to the currency in which the profits are to be computed, that is at the exchange rate found by FA93/S92D (2).

New Regulation 5(5) repeats old Regulation 5(5) in relation to the currency of the discount rate to be applied to the calculations.

New Regulation 5(6) defines

• “accounts currency” as in FA93/S92C (11) and (2)
• “appropriate exchange” rate as in FA93/S92D (2)
• “foreign operation” as above
• “functional currency” as in FA93/S92E (3)

Continuity clauses

The amending Regulations also have two continuity clauses.

The first of these repeats the clause in SI2003/2862. That SI abolished currency elections, but allowed an existing election to continue to have effect.

The second continuity clause allows insurers already making calculations in a foreign currency to continue to use that currency if SI2005/3289 (the 2005 amendments) would otherwise force them to change. The clause means that any calculations for (say) 2003 and 2004 can continue unchanged in 2005 and beyond. Any new calculations however – even if for the same part of the business – should be carried out in the currency determined by the new Regulation 5.

Controlled Foreign Companies (CFCs)

ICTA88/S747A was repealed by FA05/SCH4/PARA24. This means that no special rules are required for CFCs and they can be treated in the same way as UK resident companies.