CFM61050 - Foreign exchange: tax rules on exchange gains and losses: company has a non-sterling functional currency

Exchange gains and losses where a company has a non-sterling functional currency

Most companies operating in the UK have a sterling functional currency and prepare accounts in sterling. They convert all amounts denominated in foreign currency back into sterling.

However, you need to remember that a company may be required to draw up its accounts on the basis that it has a functional currency other than sterling if certain conditions are met (see CFM64000 on currency accounting). The company may then draw up its accounts and computations in that currency. In such cases, exchange differences will only arise if the company has assets or liabilities denominated in a different currency than its functional currency.

Example 1

A company has a functional currency of euros and prepares its accounts in euros. It takes out a euro loan from the bank.

The interest and the capital on the loan are recorded in the accounts each year. As the original loan was expressed in the euro, and the accounts are drawn up in euros, there is no comparison with a second currency. No exchange gain or loss can arise.

Example 2

The company also has a holding of UK gilts. This holding will be translated from sterling into euros at accounting dates and exchange gains or losses will arise if the exchange rate differs at the two accounting dates.