Are you adversely affected by the IFRS and new UK GAAP rules for determining functional currency?

My blog posting of 9 March 2006 “Can you still account in foreign currency?” and the related response to a reader’s comment explained that in certain cases the rules in IFRS and in FRS 23 for determining functional currency would create difficulties for groups of companies. I concluded:

“This problem, namely that IFRS and new UK GAAP make it much more difficult to account in foreign currency in straightforward situations, has been raised by our firm with HM Revenue & Customs.  As the mandatory implementation of FRS 23 is still some months away, only a limited amount of attention has so far been given to this problem.  However, the problem will become urgent if the ASB adheres to the original deadline of FRS 23 being mandatory for all UK companies for accounting periods commencing on or after 1 January 2007.”

While the posting concentrated on UK parented groups, the issue applies also to foreign parented groups, where one can find that the top UK holding company, which has historically accounted in sterling, has a foreign functional currency under IFRS/FRS 23.

Since then, the ASB has delayed the mandatory adoption of FRS 23 to 1 January 2009 at the earliest, which has deferred the impact date. However, there is no agreed solution yet. Meanwhile my colleagues Ken Howlett and Derek Jenkins have continued to have discussions with HMRC, as have others.

We and others have suggested that a solution to the problem is to decouple tax law from accounting with regard to this issue, as follows:

• Prior to the start of a period of account, any company should be permitted to file an election with HMRC for that impending period of account, and for all future periods of account. The election should be revocable, but any revocation should only apply to periods of account commencing after the revocation.
• For a period of account governed by a such an election, the tax return would be based upon the company’s statutory accounts, with such revisions as would be needed if its functional currency (in the case of accounts under IFRS or UK GAAP when FRS 23 is applicable) were the functional currency that the company would have if it had been a singleton company, and not part of a group.

HMRC have asked for some indications regarding how widespread the issue actually is, to assist them in considering what action, if any, to take regarding the issue. My PwC colleagues, both those in our Finance & Treasury Network and others, will be discussing this with their clients.

If the issue affects your group, I would be very pleased to hear from you to inform our continuing discussions with HMRC. You can give me as much or as little detail as you wish, but be assured that no identifying information will be shared beyond me and one colleague who forwards responses on this blog to me.

When responding, please bear the following questions in mind, but feel free to respond as you wish.

1. Do you have companies in the group where FRS 23/IAS 21 would cause them to have a different functional currency?
2. If you do, does the functional currency issue cause you any concerns?
3. Should measuring taxable profits in the "free standing functional currency" of a company as explained above be mandatory or optional?
4. Do you prefer a different solution?
5. Do the benefits of a "free standing functional currency" approach outweigh the compliance costs of measuring taxable profits in a different currency to the accounting profits?

As an alternative to responding to me on this blog, this link will take you to a very short electronic questionnaire.

Mohammed Amin