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Example of matching under SSAP 20

Zenbath Ltd has borrowings of $3,000,000. This partly hedges a $6,000,000 investment in a US subsidiary. The company accounts for exchange gains and losses under SSAP 20.

Suppose that the pound is worth

$1.5 at 1 January 2010

$1.6 at 31 December 2010.

In the accounts to 31 December 2010 the sterling equivalent of the liability is 拢2,000,000 at the beginning of the year and 拢1,875,000 at the end, so the company makes an exchange gain of 拢125,000.

The shares on the other hand decrease in value from 拢4,000,000 to 拢3,750,000 because of the same exchange rate movement.

Under SSAP20 the company would (when using the option available in SSAP 20) take both the loss of 拢250,000 on the shares and the gain of 拢125,000 on the loan through reserves, where the gain on the loan partially offsets the loss on the shares.

Without any provision for tax matching, the company would have to make an adjustment in the computation to tax the gain on the loan of 拢125,000 even though that gain was fully covered by the loss on shares in the accounts. The result of CTA09/S328(3), however, is that the 拢125,000 gain on the loan is disregarded - no computational adjustment is needed.

Suppose that, instead of borrowing $3,000,000 the company had borrowed $10,000,000 so that an exchange gain of 拢416,666 arises. Only 拢250,000 can be offset in reserves against the exchange loss on the investment - the remaining 拢166,666 will be credited to P&L. Again, the tax position follows the accounts. The 拢250,000 gain taken to reserves is disregarded, but the 拢166,666 credit to P&L is taxable.