A new election has been created which will be beneficial to UK companies which hedge their foreign exchange risk of holding foreign subsidiaries. The new election mainly affects companies accounting under IFRS or ‘new’ UK GAAP (FRS 23 and 26), but even in some situations where SSAP 20 used, there may be benefits in making the election.
In the absence of making the election, the amount of the hedge, such as a foreign currency loan, which can be disregarded for tax purposes is an amount up to the carrying value of the foreign subsidiary in its UK parent’s accounts, assuming certain conditions are met. However, if the foreign subsidiary has undergone significant growth since acquisition, it's underlying net asset value could far exceed it's book value.
Groups typically want to hedge the underlying net asset value of the subsidiary – as this is effectively the value of the foreign subsidiary in the consolidated accounts. Until the new election was announced, this meant that where underlying net assets were hedged, and they exceed book value, much of the hedge was still exposed to tax on an annual basis. This will no longer be the case if the election is made, again, provided the detailed conditions are met. These include a requirement to review the net asset position at least every 92 days.
However, time is tight as the election has a deadline of the later of 31 March 2008 or 30 days from the first accounting period starting on or after 1 January 2008. For example, a company with a 30 June 2008 year end will only have until 30 July 2008 to make the new election. In other cases, there is a 30 day time limit for the election to be made e.g. when a company first acquires its first foreign subsidiary or first hedges those shares.
Once made, the election is irrevocable. The election could be very beneficial to your company and if you do hedge the foreign exchange risk on holding overseas subsidiaries you need to act now if you are not to miss out.
