CFM86130 - Old rules: forex and accounts drawn up in a foreign currency: pre 2005: transactions in foreign currencies: example

Example

This guidance applies for accounting periods between 1 October 2002 and 1 January 2005

Lubtyth Ltd prepares accounts, in sterling, to 31 March 2004.

  1. It has a $100,000 bank loan which, in accordance with SSAP 20, it translates into sterling at 31 March 2004, using a published dollar/sterling exchange rate for that day.

This is an arm’s length exchange rate for the relevant day. It will use the same exchange rate to work out loan relationship credits or debits arising from exchange profits or losses on the loan. 2. It has a $100,000 bank loan which, in accordance with SSAP 20, it translates into sterling at 31 March 2004, using a published dollar/sterling exchange rate for that day.

This is an arm’s length exchange rate for the relevant day. It will use the same exchange rate to work out loan relationship credits or debits arising from exchange profits or losses on the loan. 3. It has a $100,000 bank loan which, in accordance with SSAP 20, it translates into sterling at 31 March 2004, using a published dollar/sterling exchange rate for that day.

This is an arm’s length exchange rate for the relevant day. It will use the same exchange rate to work out loan relationship credits or debits arising from exchange profits or losses on the loan. 4. The company buys a machine, on which it claims capital allowances, from an Italian supplier for €128,500. It records the purchase at the invoice date, 15 September 2003, using a published euro/sterling exchange rate for that day. For capital allowance purposes, however, the company is treated as incurring the expenditure on the date on which the obligation to pay becomes unconditional - this is 3 October 2003, when the machine is delivered. It must translate its qualifying expenditure into sterling at the exchange rate for that day (see CA11750). But in its accounts, the company has not translated €128,500 on 3 October - it has no need to - so it’s not possible to use the rate that is in the accounts.

The London closing rate for 3 October 2003 is used instead.