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?
Replies (5)
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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
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.