Exchange differences on intra group loans

When a group company lends to another in a currency that is foreign to one of them, the loan balances cancel on consolidation but the exchange gain or loss does not. FRS 102 paragraph 30.22 explains why: the loan is a commitment to convert one currency into another, so the group is genuinely exposed. The difference stays in consolidated profit or loss unless the loan is part of the net investment in a foreign operation, meaning settlement is neither planned nor likely in the foreseeable future, in which case it goes to other comprehensive income.

Why does the exchange difference not disappear with the loan?

Consolidation removes intra group balances and transactions, as described in eliminating intra group balances and transactions. With a sterling loan between two UK companies, the receivable, the payable, the interest income and the interest expense all cancel and nothing is left.

A cross currency loan is different. One of the two companies holds a monetary item in a currency other than its functional currency. Under paragraph 30.9(a) it retranslates that item at the closing rate, and under paragraph 30.10 the exchange difference goes to its profit or loss. The other company has no exchange difference, because the loan is in its own currency. On consolidation, the receivable and payable both end up at the same sterling amount and cancel, but the exchange difference recorded by only one party has nothing to cancel against. Paragraph 30.22 says an intragroup monetary asset or liability, whether short term or long term, cannot be eliminated without showing the results of currency fluctuations, and the group continues to recognise the difference in profit or loss, or in other comprehensive income where paragraph 30.13 applies.

This is the right economic answer. If the euro weakens, the group really will receive fewer pounds when its French subsidiary repays a euro loan.

Which company records the difference?

Loan currency	UK parent (sterling)	Overseas subsidiary (euro)
Euro	Foreign currency receivable; exchange difference in its profit or loss	Own currency; no exchange difference
Sterling	Own currency; no exchange difference	Foreign currency payable; exchange difference in its profit or loss
US dollar	Exchange difference	Exchange difference

The functional currency of each company, not the currency the accounts are presented in, decides this. If the overseas subsidiary is really an extension of the parent, its functional currency may be sterling under the indicators in paragraph 30.5, and a sterling loan then creates no difference anywhere. The tests are explained in functional currency and presentation currency.

How does it look in numbers?

Illustration only. UK Parent Ltd lends €1,000,000 to its French subsidiary when €1 is worth £0.85. At the year end €1 is worth £0.88. The French subsidiary’s functional currency is the euro.

Step	Parent’s accounts	Subsidiary’s accounts	Group accounts
Drawdown	Receivable £850,000	Payable €1,000,000	Cancel
Year end	Receivable £880,000; gain £30,000	Payable still €1,000,000	Subsidiary’s payable translated at closing rate to £880,000 and cancelled
Exchange difference	£30,000 gain	None	£30,000 gain in profit or loss, or in other comprehensive income if the loan is part of the net investment

If the same loan had been made in sterling, the subsidiary would record the exchange difference instead, in euros, in its own profit and loss account. That figure is then translated into sterling with the rest of the subsidiary’s results under paragraph 30.18, and the same paragraph 30.22 logic applies: it stays in the group result unless the net investment rule applies.

When does a loan form part of the net investment?

Paragraph 30.12 says a monetary item receivable from or payable to a foreign operation, for which settlement is neither planned nor likely to occur in the foreseeable future, is in substance part of the entity’s net investment in that foreign operation. Such items may include long term receivables or loans. They do not include trade receivables or trade payables. A foreign operation is defined in the glossary as a subsidiary, associate, joint venture or branch whose activities are based or conducted in a country or currency other than those of the reporting entity.

The test is about intention and likelihood, not the label on the loan. Points that support net investment treatment:

• Board minutes or a group funding policy showing the loan funds the subsidiary’s long term capital needs.
• No repayment schedule, or a history of the loan being rolled over or capitalised rather than repaid.
• Forecasts showing the subsidiary could not repay without replacement funding.

Points against it include scheduled repayments that are being made, a plan to refinance externally and repay the parent, and current account balances that are settled through trading. A loan that is repayable on demand can still qualify if there is no plan to demand it and repayment is unlikely, but the evidence has to support that reading.

If plans change and repayment becomes planned, the loan no longer meets paragraph 30.12 from that point. Later exchange differences go to profit or loss; amounts already taken to other comprehensive income stay in equity.

Where do net investment differences go in each set of accounts?

Paragraph 30.13 gives different answers for different accounts:

• Consolidated accounts: the exchange difference goes to other comprehensive income and is accumulated in equity, alongside the translation differences described in translating a foreign subsidiary in group accounts.
• The lender’s separate accounts or the borrower’s individual accounts: the difference goes to profit or loss, except that any unrealised gain is recognised in other comprehensive income.

In the example above, if the €1,000,000 loan qualifies, the group shows the £30,000 in other comprehensive income. The parent’s own accounts also show it in other comprehensive income, because it is an unrealised gain. Had the euro weakened instead, the parent would have taken the loss to its profit and loss account while the group took it to other comprehensive income.

When the foreign operation is later sold, paragraph 30.13 says these differences are not recognised in profit or loss on disposal, and paragraph 9.18A sends the cumulative exchange differences relating to a foreign subsidiary straight to retained earnings. There is no recycling under FRS 102.

Can the exposure be hedged instead?

A group that does not want exchange volatility in profit or loss has two routes. The first is the net investment classification above, which depends on facts rather than choice. The second is formal hedge accounting under Section 12, which has its own designation and documentation conditions; paragraph 30.1A excludes hedge accounting of foreign currency items from Section 30. See hedge accounting under FRS 102.

How are these exchange movements taxed?

Each company is taxed on its own figures, not the consolidated ones. Section 328(1) of the Corporation Tax Act 2009 brings exchange gains and losses arising from loan relationships into the loan relationship rules, so the lender or borrower that records the difference is usually the company with the tax consequence. Section 328(3) excludes exchange gains and losses that arise from translating a business from its functional currency into another currency and are recognised in other comprehensive income. HMRC’s Corporate Finance Manual at CFM62630 explains that the matching rules in regulation 3 of the Disregard Regulations mainly apply to liabilities matched with shares, and only more rarely to loan assets matched with shares. Where an exchange gain sits in other comprehensive income in the lender’s own accounts, check how the loan relationship rules treat it rather than assuming it is outside the charge. For companies whose own functional currency is not sterling, see calculating corporation tax in a foreign currency.

What has to be disclosed?

Paragraph 30.25 requires disclosure of the exchange differences recognised in profit or loss in the period, other than on financial instruments measured at fair value through profit or loss, and the exchange differences recognised in other comprehensive income. Groups that treat significant loans as net investments usually explain that judgement in the accounting policies.

What mistakes come up most often?

• Cancelling the exchange difference against the translation reserve on consolidation because the balances cancel.
• Treating every long term intra group loan as a net investment without evidence that settlement is neither planned nor likely.
• Classifying trading current accounts as part of the net investment, which paragraph 30.12 rules out.
• Taking an unrealised net investment loss to other comprehensive income in the parent’s own accounts, when paragraph 30.13 only sends unrealised gains there.
• Recycling the cumulative differences to profit or loss when the subsidiary is sold.

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Related Accountapedia entries

• Share for Share Exchange and Tax
• Intra group guarantees and corporate benefit
• Paying dividends up a group structure
• Unrealised profit on intra group stock
• Thin capitalisation and intra group debt

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2009 c. 4, section 328
• GOV.UK: Manual page CFM62630

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.