Recognition of Exchange Rate on Long Term Finance

How are foreign exchange rate movements reflect in accounts on long term finance

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A client purchase an asset for Euro 1,080,000. The exhange rate at that point was £1 = 1.08 Euro. Therefore asset recorded in books at £1,000,000. To help finance the purchase a loan was raised for Euro 864,000 This was shown in the management accounts as £800,000.

The exchange rate at the company's year end was £1 = 1.15 Euro.

Am I right to assume that the cost of the asset in the year end accounts remains at £1,000,000 but the outstanding finance should be shown as Euro 0.864 divided by £1.15 = £751,300

That provides an exchange rate gain of £48,700. Where should this gain be recognised in the accounts? The company is large for the purposes of reporting.

Finally common sense says that this gain is not taxable but who knows what the intention of the MP's was when it passed the legislation!!! Is this correct?

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By paul.benny
15th Apr 2020 08:37

The gain on the debt goes to P&L - see FRS102, para 30.10. You can freely download the standard from the FRC website.

I believe the gain is taxable - see https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm61120

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By ms998
15th Apr 2020 13:44

And for the second part , why would it not be taxable?

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By tom123
15th Apr 2020 13:55

I forget most of the circs, but in a previous role we had large interco balances in currency (USD), and I believe we had an agreement that neither the gains nor losses would be taxable. The phrase quasi equity was used.

Appreciate that is different to this question - but just an aside..

I would have thought in this case taxable too.

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Replying to tom123:
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By Trethi Teg
15th Apr 2020 14:01

Thank you for the feedback.

I have checked with tax specialist and it seems it is taxable. Isn't that great! Exhange rate improves in March 2019 on a debt which is not payable (in part) until 2025. No guarantee that by then the rate will be favourable but HMRc want their tax now. That cannot be fair, but I guess we are used to one sided fairness.

Supplementary question please - are these gains classified sa "realised" for the purpose of making a distribution?

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By ms998
16th Apr 2020 12:51

If the fx reverses then you get the loss.

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