LLM2110 - Syndicate accounts: taxation: transactions in foreign currencies (2)

Tax adjustments may be required in the computations of a syndicate’s profit or loss in a number of cases.

Forex differences after closing date

Syndicate profits may be distributed partly or wholly in US dollars. Since there is a delay between the closing date of the accounts and the distribution of profits, the value of US$ profits distributed to members will be different to the value of profits shown in the accounts. The managing agent should therefore include in the syndicate return an adjustment to take into account the forex difference arising on US$ distributed between the year end and the date of distribution. For example, in the case of a US$ profit release made in spring 1999 in respect of the 1996 year of account closing on 31 December 1998, the exchange rate at the year end was 1:1.66, and at the spring release date it was 1:1.61:

Forex on early releases

A forex adjustment will similarly be required if non-sterling assets are released from syndicate accounts before the accounting date. This is because the accounting method adopted at Lloyd’s includes within the income calculation an implicit allowance for forex differences on the assets until the accounts date ( LLM2100). If the asset was not held at the accounts date, nor used to fund an allowable expense, then a Case I forex adjustment will be required.

Forex on cash calls in US dollars

If a cash call is denominated and paid in dollars, a forex adjustment can arise on the dollars received by the syndicate, just as it would on any foreign currency asset. Forex gains or losses on dollars held as a result of cash calls should be computed for the period during which they are held by a syndicate, and this forex result should be reported by the syndicate.

Forex on cash call debts

However, the situation is different if a forex difference arises on the cash call itself. A managing agent may make a cash call, and be obliged under Lloyd’s rules to accept dollars at an exchange rate which differs from the actual rate at the time. In these circumstances, any forex gain or loss on cash call debts should be excluded from the syndicate result, as the cash call is not a trade debt.