CFM12070 - Understanding corporate finance: foreign exchange: exchange rates used in company accounts

Exchange rates used in company accounts

In the process of drawing up their accounts, companies which account in sterling need to translate payments and receipts in foreign currencies, and the value of foreign currency denominated assets and liabilities, into sterling. They may also have to make foreign currency translations when preparing their tax computations.

Some companies may use the London closing rate (CFM12060) for the appropriate day when preparing their accounts and computations. But the London closing rate has no official or privileged status. In many cases, companies will use some different exchange rate in their accounts and computations.

Companies get exchange rate data from a variety of sources:

• A company may use the exchange rates quoted by its bank.
• HM Revenue and Customs publishes average monthly rates of exchange which traders must use when preparing VAT returns (the ‘VAT rate’). Some companies may also use the VAT rate when recording foreign currency transactions in their accounts.
• The company may record a transaction in its accounting records using the exchange rate shown in the relevant documentation. For example, if an employee on business in the USA uses a company credit card to make a purchase for $100, the credit card company will translate $100 into sterling at its own exchange rate. Companies will normally record the purchase at the sterling amount shown on the credit card statement, including any commission element.

Information on exchange rates

For the purposes of direct taxes, HMRC staff will generally accept the exchange rate which a company uses in preparing its accounts, provided it uses that rate consistently.

They should, however, give the London closing rate if a customer asks for exchange rate data. These rates are available at https://www.gov.uk/government/collections/exchange-rates-for-customs-and-vat. The site gives the average exchange rate for the year for most currencies quoted in the Financial Times, plus the London closing spot rates on the last business day in March and December each year for major currencies.

Various Internet sites give data on current and historic exchange rates. The rates quoted on such sites are generally not London closing rates, and HMRC staff should not use the rates obtained from such sites when answering queries from customers.

However, some specialist financial organisations may use a more sophisticated methodology to calculate the average exchange rates than that shown on the HMRC website. You should not, without good justification, reject translations of non-sterling profits into sterling at average rates based on some other reliable source, such as a major international bank or a well-accredited financial website.