Were a company’s accounts prepared in accordance with UK GAAP?
This case hinged on whether the taxpayer’s accounts were prepared in accordance with UK generally accepted accounting practice (GAAP). The functional currency used to prepare the statutory accounts was changed from GBP to US dollars resulting in the recognition of a large foreign exchange loss which the taxpayer had claimed in their corporation tax return. HMRC rejected the claim for the foreign exchange loss, saying that the accounts functional currency should have remained as GBP.
The taxpayer had entered into an arrangement which involved becoming a party to a derivative contract which triggered the right to apply a particular accounting standard, FRS 23 (The Effects of Changes in Foreign Exchange Rates). Applying this standard resulted in a change in the functional currency used to prepare the statutory accounts which generated a foreign exchange loss. The First-tier Tribunal (FTT) had to decide whether the taxpayer had properly applied FRS 23 when changing its functional currency to US dollars.
The FTT agreed with Counsel for the taxpayer that it would have been sufficient to show that the taxpayer’s accounts were in accordance with a reasonable interpretation of GAAP but this was not the case here. As a result, the Tribunal agreed with HMRC that the functional currency should have been GBP and therefore the accounts were not UK GAAP compliant.
In one respect, the decision is only of historic interest because anti-avoidance provisions were introduced in FA 2011 to counteract this type of arrangement.
However, the case is significant in that the FTT determined that the interpretation of FRS 23 and its application to the particular circumstances as adopted by the taxpayer, its auditors and accounting advisers was not correct and the fact that a number of accounting firms regarded it as correct did not mean that the approach adopted was a reasonable application of FRS 23.
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