CFM64520 - Foreign exchange: accounts drawn up in a foreign currency: designated currency election: conditions

Conditions for making an election

An investment company can make a designated currency election where it meets one of two conditions.

Condition A: significant proportion of assets and liabilities are in the designated currency

The first condition (condition A) set out in CTA10/S9A(4) is that a significant proportion of a company’s assets and liabilities are denominated in the designated currency.

‘A significant proportion’ is not defined and will depend on the facts of individual companies but will, in general, be the currency to which the investment company has the most exposure as a result of owing foreign currency assets or owing foreign currency liabilities. A common sense approach should be adopted which takes into account not just the proportion of currency assets and liabilities but other factors such as the relative exchange rate volatility of different currencies.

Condition B: the consolidation condition

The second condition (Condition B in CTA10 s9A(5)) allows the functional currency of the ultimate parent company to be the designated currency.

This condition is met where:
• the designated currency is the functional currency of another company (Company Y), and
• it is reasonable to assume that the two companies will meet the consolidation condition.

The investment company making the election (Company X) and another company (Company Y) meet the consolidation condition where company X’s results are comprised in the consolidated financial statements of the group of which Company Y is the ultimate parent company under Corporate Interest Restriction (see CFM95335).