FOREIGN CURRENCY TRANSLATION
- IAS 21: The effects of changes in foreign exchange rates
Transactions in Foreign Currency
Lifecycle of a foreign currency transaction
- Initial recognition
- Translate the foreign currency amount into the functional currency at the spot exchange rate on the transaction date.
- E.g. Dr Receivables, Cr Sales with Yen(US$100 * 100)
- Reporting at period end
- For monetary items
- Cash, payables, receivables
- Re-translate using closing rate at period end
- E.g. Cr Receivables, Dr Income Statement (exchange loss) with Yen(US$100 * (100 – 80)), due to a strengthened Yen
- For non-monetary items
- Inventory, non-current assets
- Not re-translated, kept at initial recognition amount
- If there is a revaluation to fair value, re-translate at the exchange rate at the date of the FV adjustment.
- Re-translate using exchange rate at settlement
- E.g. Dr Cash with Yen(US$100 * 90), Cr Receivable with Yen(US$100 * 80), Cr Income Statement (exchange gain) with Yen(US$100 * (90-80)), due to a weaker Yen.
- Exchange differences (in the functional currency) upon re-translation or settlement are recognised in P&L. If gain/loss on a non-monetary item is recognised in OCI, then exchange differences on that item should be recognised in OCI as well.
Consolidation of Foreign Operations
Statement of Financial Position
- Translated at closing rate (rate at reporting date)
Statement of Comprehensive Income / Income Statement
- Transactions are translated at their individual dates. A single average rate can be used for all transactions if reasonable.
Consolidated Statement of Financial Position
- Perform the consolidation as per normal.
- Calculated in the functional currency of the foreign Sub and then re-translated at closing rate. The rate previously used is the rate at the acquisition date.
- Exchange difference is recognised in OCI and credited to foreign exchange reserve within Equity.
- Parent’s reserves
- Add a “Foreign currency gain/loss on the Cost of Investment of the Sub” = Cost of Investment * (closing rate – acquisition rate) to match up with the Goodwill computation.
Calculating Exchange Difference for reporting in OCI
- Foreign Exchange Reserve
- A separate foreign exchange reserve under Equity (not retained earnings) is created for all exchange differences.
- All exchange differences are recognised in OCI (not P&L), and flow into this separate reserve.
- This reserve will be maintained until the foreign operation is disposed.
- Total exchange gain/loss is the balancing figure in the group’s reserve movement (the easy way)
- Opening group reserves
- Profits for the year
- – Dividends paid
- + Total exchange gain/loss
- = Closing group reserves
- Total exchange gain/loss = exchange gain/loss in closing net assets + exchange gain/loss in goodwill (the hard way)
- Exchange gain/loss in “Closing Net Assets” = Closing Net Assets * Closing rate – (Opening Net Assets * Opening Rate + Sub’s Profits for the year * Average rate)
- Exchange gain/loss in Goodwill = Closing goodwill * (Closing rate – Opening rate)
- Group’s share of Exchange gain/loss =
- Exchange gain/loss in Goodwill
- + Group’s interest in Sub * Exchange gain/loss in Closing Net Assets
- NCI’s share of Exchange gain/loss =
- NCI’s interest in Sub * Exchange gain/loss in Closing Net Assets
- Increase in Parent’s reserves (the hard way)
- Share of Sub’s profit (= Group’s interest in Sub * Sub’s Profits for the year * Average rate)
- + Group’s share of Exchange gain/loss
- NCI (the hard way)
- NCI share of net assets at acquisition = NCI interest in Sub * Net assets at acquisition * Rate at acquisition
- + NCI share of post-acquisition profits = NCI interest in Sub * Post-acquisition profits * Average rate
- + NCI’s share of Exchange gain/loss
- NCI (the easy way)
- NCI interest in Sub * Closing Net Assets * Closing rate
Handling Exchange Gain/Loss in OCI during Disposal of Sub
- The cumulative balance in the separate equity reserve (i.e. previously recognised in OCI) is reclassified to P&L (added to the Gain on disposal of Sub).
- Amount reclassified is proportionate to % of Sub disposed. Note that amounts attributed to NCI is not reclassified.
- To prevent equity being impacted the 2nd time (i.e. double counting of gain/loss), an offsetting loss/gain will be entered into OCI.