The Federal Inland Revenue Service (FIRS) has outlined specific guidelines for accounting for foreign currency transactions referencing the International Financial Reporting Standards (IFRS).
“Generally, only expenses that are wholly, exclusively, necessarily and reasonably incurred in the production of a taxable income may be deducted in order to ascertain the assessable profits for the relevant year of assessment, in line with Sections 24(1) & 27 of the Companies Income Tax Act (CITA), Sections 20 & 21 of the Personal Income Tax Act (PITA) and Sections 10 & 13 of the Petroleum Profits Tax Act (PPTA),” FIRS said in a statement released Wednesday.
However, FIRS noted that these treatments may not align with Nigeria’s tax regulations but the statement aims to clarify the necessary adjustments for determining the tax implications of foreign exchange differences, ensuring accurate tax computation and compliance.
This circular withdraws and replaces Information Circular No. 2024/3 of 14th June 2024, previously issued by the FIRS on the subject.
President Bola Tinubu had earlier written to the Senate seeking to amend the 2023 Finance Act to introduce the payment of a one-time windfall tax on the foreign exchange revaluation profits of banks in the 2023 financial year.
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But the Senate amended the bill on Tuesday by increasing it to 70 percent, stressing that the windfall was not a result of any effort of the banks or value addition, but as a result of government policy which must be redistributed.
The International Financial Reporting Standards (IFRS) prescribe the treatment of foreign currency transactions in the financial statements of an entity for accounting purposes.
The FIRS in the statement said that foreign exchange differences arise where the foreign exchange rate used in booking a foreign-currency transaction differs from the rate used on a subsequent reporting or settlement date.
It sighted an example saying, “Assume that Needy Ltd borrowed $1m through a Nigerian bank on a date that the exchange rate was N500 to $1; and the loan must be repaid at the end of 24 months in the same currency,”
“The loan would be recorded in the books of Needy Ltd on the date of the transaction as N500m ($1m x 500). At the accounting year-end, if the exchange rate has moved to N600:$1, the amount of loan due in naira would be N600m ($1m x 600). A difference of N100m has arisen due to an increase in exchange rate from N500:$1 to N600:$1,” the statement said.
It stated that foreign exchange rates can rise or fall. “Where the exchange rate rises, the resulting exchange difference is a loss to the paying party (Needy Ltd). On the other hand, if the exchange rate falls i.e., comes down, a gain accrues to the paying party.”
It said that foreign exchange differences are further classified as either realised or unrealised.
“Unrealised exchange differences occur when the revaluation of a foreign-currency transaction arose from mere accounting (reporting) purposes and does not result in payment or receipt of the revalued sum,”
“Realised exchange differences occur when a foreign-currency transaction is closed at an exchange rate different from the booking rate, thereby resulting into payment or receipt of the revalued sum’” it stated.
it further explained that For monetary and non-monetary items, exchange differences will be treated differently.
“ Exchange differences on the settlement or recovery of a monetary item is a realised exchange difference,”
“ Exchange differences on foreign currency cash balances are realised upon conversion to another currency or another class of monetary or non-monetary item,”
“Exchange differences on any item which is monetary in nature is treated as taxable income or deductible expense for income tax purposes,” the statement said.
