Key definitions
Foreign currency transactions in the individual financial statements of a company were covered earlier in this text.
Below is a reminder of some key definitions:
The functional currency is the currency of the ‘primary economic environment where the entity operates’ (IAS 21, para 8). In most cases
this will be the local currency.
The presentation currency is the ‘currency in which the entity presents its financial statements’ (IAS 21, para 8).
2 Consolidation of a foreign operation
The functional currency used by a subsidiary to prepare its own individual accounting records and financial statements may differ from the presentation currency used for the group financial statements. Therefore, prior to adding together the assets, liabilities, incomes and expenses of the parent and subsidiary, the financial statements of an overseas subsidiary must be translated.
Translating the subsidiary’s financial statements
The rules for translating an overseas subsidiary into the presentation currency of the group are as follows:
- Incomes, expenses and other comprehensive income are translated at the rate in place at the date of each transaction. The average rate for the year may be used as an approximation.
- Assets and liabilities are translated at the closing rate.
Illustration 1 – Dragon
This example runs through the chapter and is used to illustrate the basic steps involved in consolidating an overseas subsidiary.
Dragon bought 90% of the ordinary shares of Tattoo for DN180 million on 31 December 20X0. The retained earnings of Tattoo at this date were DN65 million. The fair value of the non-controlling interest at the acquisition date was DN14 million.
The financial statements of Dragon and Tattoo for the year ended 31
December 20X1 are presented below:
Statements of profit or loss for year ended 31 December 20X1
| Dragon | Tattoo | |
| $m | DNm | |
| Revenue | 1,200 | 600 |
| Costs | (1,000) | (450) |
| –––––– | –––––– | |
| Profit | 200 | 150 |
| –––––– | –––––– | |
| Statements of financial position as at 31 December 20X1 | ||
| Dragon | Tattoo | |
| $m | DNm | |
| Property, plant and equipment | 290 | 270 |
| Investments | 60 | – |
| Current assets | 150 | 130 |
| –––––– | –––––– | |
| 500 | 400 | |
| –––––– | –––––– | |
| Share capital | 10 | 5 |
| Retained earnings | 290 | 215 |
| Liabilities | 200 | 180 |
| –––––– | –––––– | |
| 500 | 400 | |
| –––––– | –––––– |
There has been no intra-group trading. Goodwill arising on the acquisition of Tattoo is not impaired. The presentation currency of the consolidated financial statements is the dollar ($).
| Exchange rates are as follows: | |
| DN to $ | |
| 31 December 20X0 | 3.0 |
| 31 December 20X1 | 2.0 |
| Average for year to 31 December 20X1 | 2.6 |
Required:
For inclusion in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 20X1, calculate:
- Revenue
- Costs
For inclusion in the consolidated statement of financial position as at 31 December 20X1, calculate:
- Property, plant and equipment
- Investments
- Current assets
- Share capital
- Liabilities
Solution
| $m | |
| Revenue ($1,200 + (DN600/2.6)) | 1,430.8 |
| Costs ($1,000 + (DN450/2.6)) | (1,173.1) |
| PPE ($290 + (DN270/2)) | 425.0 |
| Investments (eliminated on consolidation) | – |
| Current assets ($150 + (DN130/2)) | 215.0 |
| Share capital (Dragon only) | 10.0 |
| Liabilities ($200 + (DN180/2)) | 290.0 |
Remember, the incomes and expenses of an overseas subsidiary are translated at the average rate. The assets and liabilities are translated at the closing rate.
Translating goodwill
Goodwill should be calculated in the functional currency of the subsidiary.
According to IAS 21, goodwill should be treated like other assets of the subsidiary and therefore translated at the reporting date using the closing rate.
As with all consolidated statement of financial position questions, it may be helpful to produce a table showing the subsidiary’s net assets (at fair value) at both the year end and acquisition date (‘Working 2’). This should be completed in the functional currency of the subsidiary.
Illustration 2 – Goodwill
Required:
Using the information in illustration 1, calculate goodwill for inclusion in the consolidated statement of financial position for the Dragon group as at 31 December 20X1.
Solution
Goodwill calculation
| DNm | |
| Consideration | 180 |
| NCI at acquisition | 14 |
| Net assets at acquisition (W) | (70) |
| –––– | |
| 124 | |
| Goodwill impairments | – |
| –––– | |
| 124 | |
| –––– |
Goodwill is translated at the closing rate to give a value of $62m (DN124/2).
(W) Net assets of Tattoo
| Acquisition date Reporting date Post-acquisition | |||
| DNm | DNm | DNm | |
| Share capital | 5 | 5 | |
| Retained earnings | 65 | 215 | |
| –––––– | –––––– | –––––– | |
| 70 | 220 | 150 | |
| –––––– | –––––– | –––––– | |
Exchange differences
The process of translating an overseas subsidiary gives rise to exchange gains and losses. These gains and losses arise for the following reasons:
- Goodwill: Goodwill is retranslated each year-end at the closing rate. It will therefore increase or decrease in value simply because of exchange rate movements.
- Opening net assets: At the end of the prior year, the net assets of the subsidiary were translated at the prior year closing rate. This year, those same net assets are translated at this year’s closing rate. Therefore, opening net assets will have increased or decreased simply because of exchange rate movements.
- Profit: The incomes and expenses (and, therefore, the profit) of the overseas subsidiary are translated at the average rate. However, making a profit increases the subsidiary’s assets which are translated at the closing rate. This disparity creates an exchange gain or loss.
Current year exchange gains or losses on the translation of an overseas subsidiary and its goodwill are recorded in other comprehensive income.
Goodwill translation
The proforma for calculating the current year gain or loss on the retranslation of goodwill is as follows:
| DN | Exchange Rate | $ | |
| Opening goodwill | X | Opening rate | X |
| Impairment loss in year | (X) | Average rate | (X) |
| Exchange gain/(loss) | – | Bal fig. | X/(X) |
| –––––– | –––––– | ||
| Closing goodwill | X | Closing rate | X |
| –––––– | –––––– |
If the subsidiary was purchased part-way through the current year, then substitute ‘opening goodwill’ for ‘goodwill at acquisition’. This would then be translated at the rate of exchange on the acquisition date.
It is important to pay attention to the method of goodwill calculation:
- If the full goodwill method has been used, gain and losses will need to be apportioned between the group and the non-controlling interest.
- If the proportionate goodwill method has been used, then all of the exchange gain or loss on goodwill is attributable to the group.
Illustration 3 – Translating goodwill
Required:
Using the information in illustration 1, calculate the exchange gain or loss arising on the translation of the goodwill that will be credited/charged through other comprehensive income in the year ended 31 December 20X1.
Who is this gain or loss attributable to?
Solution
| DNm | Exchange Rate | $m | |
| Opening goodwill | 124.0 | 3.0 | 41.3 |
| Impairment loss in year | – | 2.6 | – |
| Exchange gain | – | Bal fig. | 20.7 |
| –––––– | –––––– | ||
| Closing goodwill | 124.0 | 2.0 | 62.0 |
| –––––– | –––––– | ||
The total translation gain of $20.7m will be credited to other comprehensive income.
This is then allocated to the group and NCI based on their respective shareholdings:
Group: $20.7m × 90% = $18.6m
NCI: $20.7m × 10% = $2.1m
Opening net assets and profit
The exchange gains or losses arising on the translation of opening net assets and profit for the year are generally calculated together.
The proforma for calculating the current year exchange gain or loss on the translation of the opening net assets and profit is as follows:
| DN | Exchange Rate | $ | |
| Opening net assets | X | Opening rate | X |
| Profit/(loss) for the year | X/(X) | Average rate | X/(X) |
| Exchange gain/(loss) | – | Bal fig. | X/(X) |
| –––––– | –––––– | ||
| Closing net assets | X | Closing rate | X |
| –––––– | –––––– |
If the subsidiary was purchased part-way through the current year, then substitute ‘opening net assets’ and ‘opening rate’ for ‘acquisition net assets’ and ‘acquisition rate’.
The gain or loss on translation of the opening net assets and profit is apportioned between the group and non-controlling interest based on their respective shareholdings.
Illustration 4 – Opening net assets and profit
Required:
Using the information in illustration 1, calculate the exchange gain or loss arising on the translation of the opening net assets and profit of Tattoo that will be credited/charged through other comprehensive income in the year ended 31 December 20X1.
Who are these gains or losses attributable to?
Solution
| DNm | Exchange Rate | $m | |
| Opening net assets* | 70 | 3.0 | 23.3 |
| Profit/(loss) for the year* | 150 | 2.6 | 57.7 |
| Exchange gain/(loss) | – | Bal fig. | 29.0 |
| –––––– | –––––– | ||
| Closing net assets* | 220 | 2.0 | 110.0 |
| –––––– | –––––– | ||
*These figures are taken from the net assets working, which can be found in the solution to illustration 2.
The total translation gain of $29.0m will be credited to other comprehensive income.
This is then allocated to the group and NCI based on their respective shareholdings:
Group: 29.0 × 90% = $26.1m
NCI: 29.0 × 10% = $2.9m
Exchange differences on the statement of financial position
Exchange gains and losses arising from the translation of goodwill and the subsidiary’s opening net assets and profit which are attributable to the group are normally held in a translation reserve, a separate component within equity.
Illustration 5 – Reserves
Required:
Using the information in illustration 1, calculate the non-controlling interest, retained earnings and the translation reserve for inclusion in the consolidated statement of financial position as at 31 December 20X1.
Solution
Non-controlling interest
| $m | ||
| NCI at acquisition (DN14/3 opening rate) | 4.7 | |
| NCI % of Tattoo’s post-acquisition profits | 5.7 | |
| (10% × (DN150/2.6 average rate)) | ||
| NCI % of goodwill translation (illustration 3) | 2.1 | |
| NCI % of net assets and profit translation (illustration 4) | 2.9 | |
| –––––– | ||
| 15.4 | ||
| –––––– | ||
| Retained earnings | ||
| $m | ||
| 100% of Dragon | 290.0 | |
| 90% of Tattoo’s post-acquisition profits | 51.9 | |
| (90% × (DN150/2.6)) | –––––– | |
| 341.9 | ||
| –––––– | ||
| Translation reserve | ||
| $m | ||
| Group share of goodwill forex (illustration 3) | 18.6 | |
| Group share of net assets and profit forex (illustration 4) | 26.1 | |
| –––––– |
44.7
––––––
Illustration 6 – Completing the financial statements
Required:
Using the information in illustration 1, complete the consolidated statement of financial position and the statement of profit or loss and other comprehensive income for the Tattoo group for the year ended 31 December 20X1.
Solution
Statement of profit or loss and other comprehensive income for year ended 31 December 20X1
| $m | ||
| Revenue (illustration 1) | 1,430.8 | |
| Costs (illustration 1) | (1,173.1) | |
| ––––––– | ||
| Profit for the year | 257.7 | |
| Other comprehensive income – | ||
| items that may be classified to profit or loss in future periods | ||
| Exchange differences on translation of foreign subsidiary | 49.7 | |
| ($20.7 (illustration 3) + $29.0 (illustration 4)) | ––––––– | |
| Total comprehensive income for the year | 307.4 | |
| Profit attributable to: | ––––––– | |
| Owners of Dragon (bal. fig.) | 251.9 | |
| Non-controlling interest | 5.8 | |
| (10% × (DN150/2.6 avg. rate)) | ––––––– | |
| Profit for the year | 257.7 | |
| ––––––– | ||
| Total comprehensive income attributable to: | ||
| Owners of Dragon (bal. fig.) | 296.6 | |
| Non-controlling interest | 10.8 | |
| ($5.8 (profit) + $2.1 (illustration 3) + $2.9 (illustration 4)) | ––––––– | |
| Total comprehensive income for the year | 307.4 | |
| ––––––– |
| Statement of financial position as at 31 December 20X1 | |||
| $m | |||
| Property, plant and equipment (illustration 1) | 425.0 | ||
| Goodwill (illustration 2) | 62.0 | ||
| Current assets (illustration 1) | 215.0 | ||
| –––––– | |||
| 702.0 | |||
| –––––– | |||
| Share capital (illustration 1) | 10.0 | ||
| Retained earnings (illustration 5) | 341.9 | ||
| Translation reserve (illustration 5) | 44.7 | ||
| –––––– | |||
| 396.6 | |||
| Non-controlling interest (illustration 5) | 15.4 | ||
| –––––– | |||
| 412.0 | |||
| Liabilities (illustration 1) | 290.0 | ||
| –––––– | |||
| 702.0 | |||
| –––––– | |||
Test your understanding 1 – Parent and Overseas
Parent is an entity that owns 80% of the equity shares of Overseas, a foreign entity that has the Shilling as its functional currency. The subsidiary was acquired at the start of the current accounting period on 1 January 20X7 when its retained earnings were 6,000 Shillings.
At that date the fair value of the net assets of the subsidiary was 20,000 Shillings. This included a fair value adjustment in respect of land of 4,000 Shillings that the subsidiary has not incorporated into its accounting records and still owns.
Goodwill, which is unimpaired at the reporting date, is to be accounted for using the full goodwill method. At the date of acquisition, the non-controlling interest in Overseas had a fair value of 5,000 Shillings.
| Statements of financial position: | Parent | Overseas | |
| $ | Shillings | ||
| Investment (20,999 shillings) | 3,818 | ||
| Assets | 9,500 | 40,000 | |
| ––––––– | ––––––– | ||
| 13,318 | 40,000 | ||
| Equity and liabilities | ––––––– | ––––––– | |
| Equity capital | 5,000 | 10,000 | |
| Retained earnings | 6,000 | 8,200 | |
| Liabilities | 2,318 | 21,800 | |
| ––––––– | ––––––– | ||
| 13,318 | 40,000 | ||
| ––––––– | ––––––– | ||
| Statement of profit or loss for the year: | Parent | Overseas | |
| $ | Shillings | ||
| Revenue | 8,000 | 5,200 | |
| Costs | (2,500) | (2,600) | |
| –––––– | ––––––– | ||
| Profit before tax | 5,500 | 2,600 | |
| Tax | (2,000) | (400) | |
| –––––– | ––––––– | ||
| Profit for the year | 3,500 | 2,200 | |
| –––––– | ––––––– |
Neither entity recognised any other comprehensive income in their individual financial statements during the reporting period.
| Relevant exchange rates (Shillings to $1) are: | |
| Date | Shillings: $1 |
| 1 January 20X7 | 5.5 |
| 31 December 20X7 | 5.0 |
| Average for year to 31 December 20X7 | 5.2 |
Required:
Prepare the consolidated statement of financial position at 31 December 20X7, together with a consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 20X7.
Test your understanding 2 – Saint and Albans
On the 1 July 20X1 Saint acquired 60% of Albans, whose functional currency is Ds. The presentation currency of the Saint group is the dollar ($). The financial statements of both entities are as follows.
| Statements of financial position as at 30 June 20X2 | ||
| Saint | Albans | |
| Assets | $ | D |
| Investment in Albans | 5,000 | – |
| Loan to Albans | 1,400 | – |
| Property, plant and equipment | 10,000 | 15,400 |
| Inventories | 5,000 | 4,000 |
| Receivables | 4,000 | 500 |
| Cash and cash equivalents | 1,600 | 560 |
| –––––– | –––––– | |
| 27,000 | 20,460 | |
| –––––– | –––––– | |
| Equity and liabilities | $ | D |
| Equity capital ($1/D1) | 10,000 | 1,000 |
| Share premium | 3,000 | 500 |
| Retained earnings | 4,000 | 12,500 |
| Non-current liabilities | 5,000 | 5,460 |
| Current liabilities | 5,000 | 1,000 |
| ––––––– | ––––––– | |
| 27,000 | 20,460 | |
| ––––––– | ––––––– | |
| Statements of profit or loss for the year ended 30 June 20X2 | ||
| Saint | Albans | |
| $ | D | |
| Revenue | 50,000 | 60,000 |
| Cost of sales | (20,000) | (30,000) |
| ––––––– | –––––– | |
| Gross profit | 30,000 | 30,000 |
| Distribution and Administration expenses | (20,000) | (12,000) |
| ––––––– | ––––––– | |
| Profit before tax | 10,000 | 18,000 |
| Tax | (8,000) | (6,000) |
| ––––––– | ––––––– | |
| Profit for the year | 2,000 | 12,000 |
| ––––––– | ––––––– | |
Note: There were no items of other comprehensive income within the individual financial statements of either entity.
The following information is applicable.
- Saint purchased the shares in Albans for D10,000 on the first day of the accounting period. At the date of acquisition the retained earnings of Albans were D500 and there was an upward fair value adjustment of D1,000. The fair value adjustment is attributable to plant with a remaining five-year life as at the date of acquisition. This plant remains held by Albans and has not been revalued.
- Just before the year-end Saint acquired some goods from a third party at a cost of $800, which it sold to Albans for cash at a mark up of 50%. At the reporting date all these goods remain in the inventories of Albans.
- On 1 June X2 Saint lent Albans $1,400. The liability is recorded at the historic rate within the non-current liabilities of Albans.
- No dividends have been paid.
- Goodwill is to be accounted using the full goodwill method. An impairment review was performed and goodwill had reduced in value by 10% at 30 June 20X2. Impairment is to be charged to cost of sales. The fair value of the non-controlling interest at the date of acquisition was D5,000.
- On 1 July 20X1, Saint received a government grant for $4,000. This grant was provided as a contribution towards the costs of training employees over the next two years. Saint has reduced its administrative expenses by the full $4,000.
- On 30 June 20X2, Saint sold $2,000 of receivables to a factor for $1,500. Saint must reimburse the factor with any amounts not collected by 31 December 20X2. Saint has credited the proceeds received against receivables.
| (viii)Exchange rates are as follows: | |
| D: $1 | |
| 1 July 20X1 | 2.00 |
| Average rate | 3.00 |
| 1 June 20X2 | 3.90 |
| 30 June 20X2 | 4.00 |
Required:
Prepare the group statement of financial position as at 30 June 20X2 and the group statement of profit or loss and other comprehensive income for the year ended 30 June 20X2.
3 Disposals
On the disposal of a foreign subsidiary, the cumulative exchange differences recognised as other comprehensive income and accumulated in a separate component of equity become realised.
IAS 21 requires that these exchanges differences are recycled (i.e. reclassified) on the disposal of the subsidiary as part of the profit/loss on disposal.
Test your understanding 3 – LUMS Group
The LUMS group has sold its entire 100% holding in an overseas subsidiary for proceeds of $50,000. The net assets at the date of disposal were $20,000 and the carrying value of goodwill at that date was $10,000. The cumulative balance on the group foreign currency reserve is a gain of $5,000.
Required:
Calculate the gain arising on the disposal of the foreign subsidiary in the consolidated statement of profit or loss.
4 Other issues
Shortcomings in IAS 21
In relation to IAS 21, the following criticisms have been made:
Lack of theoretical underpinning
It is not clear why foreign exchange gains and losses on monetary items are recorded in profit or loss, yet foreign exchange gains and losses arising on consolidation of a foreign operation are reported in other comprehensive income (OCI).
It is argued that recording foreign exchange gains or losses on monetary items in profit or loss increases the volatility of reported profits. As such, it has been suggested that foreign exchange gains or losses should be recorded in OCI if there is a high chance of reversal.
Long-term items
It is argued that retranslating long-term monetary items using the closing rate does not reflect economic substance. This is because a current exchange rate is being used to translate amounts that will be repaid in the future.
Foreign exchange gains and losses on long-term items are highly likely to reverse prior to repayment/receipt, suggesting that such gains and losses are unrealised. This provides further weight to the argument that foreign exchange gains and losses on at least some monetary items should be recorded in OCI.
The average rate
IAS 21 does not stipulate how to determine the average exchange rate in the reporting period. This increases the potential for entities to manipulate their net assets or total comprehensive income.
The use of different average rates will limit comparability between reporting entities.
Monetary/non-monetary
The distinction between monetary and non-monetary items can be ambiguous and would benefit from further clarification.
Foreign operations
IAS 21 uses a restrictive definition of a ‘foreign operation’ – a subsidiary, associate, joint venture or branch whose activities are based in a country or currency other than that of the reporting entity. It is argued that IAS 21 should instead use a definition of a foreign operation that is based on substance, rather than legal form.
Test your understanding 1 – Parent and Overseas
Group statement of financial position
Note: The assets and liabilities of Overseas have been translated at the closing rate.
| $ | |
| Goodwill (W3) | 1,200 |
| Assets ($9,500 + ((Sh40,000 + Sh4,000 FVA)/5.0)) | 18,300 |
| –––––– | |
| 19,500 | |
| –––––– | |
| Equity and liabilities | $ |
| Equity capital | 5,000 |
| Retained earnings (W5) | 6,338 |
| Translation reserve (W6) | 392 |
| –––––– | |
| 11,730 | |
| Non-controlling interest (W4) | 1,092 |
| –––––– | |
| Total equity | 12,822 |
| Liabilities ($2,318 + (Sh21,800/5.0)) | 6,678 |
| –––––– |
19,500
––––––
Group statement of profit or loss and other comprehensive income for the year
Note: The income and expenses for Overseas have been translated at the average rate.
| $ | |
| Revenue ($8,000 + (Sh5,200/5.2)) | 9,000 |
| Costs ($2,500 + (Sh2,600/5.2)) | (3,000) |
| ––––– | |
| Profit before tax | 6,000 |
| Tax ($2,000 + (Sh400/5.2)) | (2,077) |
| ––––– | |
| Profit for the year | 3,923 |
| Other comprehensive income | ||
| Items that may be reclassified to profit or loss in future periods | ||
| Exchange differences on translation of foreign subsidiary | 490 | |
| ($109 (W3) + $381 (W6)) | ––––– | |
| Total comprehensive income for the year | 4,413 | |
| Profit for the year attributable to: | ––––– | |
| Owners of Parent (bal. fig.) | 3,838 | |
| Non-controlling interest (20% × (Sh2,200/5.2)) | 85 | |
| ––––– | ||
| 3,923 | ||
| Total comprehensive income attributable to: | ––––– | |
| Owners of Parent (bal. fig.) | 4,230 | |
| Non-controlling interest $85 (profit) + $22(W3) + $76(W7) | 183 | |
| ––––– |
4,413
–––––
Workings
(W1) Group structure
P
80%
- NCI = 20% for complete year
(W2) Net assets of subsidiary in functional currency
| Acq’n date | Rep date | ||
| Shillings | Shillings | Shillings | |
| Share capital | 10,000 | 10,000 | |
| Retained earnings | 6,000 | 8,200 | |
| Fair value adjustment – land | 4,000 | 4,000 | |
| ––––– | ––––– | ––––– | |
| 20,000 | 22,200 | 2,200 | |
| ––––– | ––––– | ––––– |
(W3) Goodwill calculation and forex
| Calculation of goodwill | |||||
| Full goodwill: | Shillings | ||||
| Cost of investment | 20,999 | ||||
| ($3,818 × 5.5) | |||||
| FV of NCI at acquisition | 5,000 | ||||
| –––––– | |||||
| 25,999 | |||||
| FV of NA at acquisition (W2) | (20,000) | ||||
| –––––– | |||||
| Full goodwill at acquisition | 5,999 | ||||
| –––––– | |||||
| Translate at closing rate | $1,200 | ||||
| (Sh5,999/5) | –––––– | ||||
| Goodwill forex | |||||
| Shillings | Exchange | $ | |||
| rate | 1,091 | ||||
| Goodwill at acquisition | 5,999 | 5.5 | |||
| Impairment | – | – | |||
| Exchange gain | bal. fig | 109 | |||
| –––– | –––– | ||||
| Closing goodwill | 5,999 | 5.0 | 1,200 | ||
| –––– | –––– | ||||
| The exchange gain on the retranslation of goodwill is allocated | |||||
| between the group and NCI based upon their respective | |||||
| shareholdings: | |||||
| Group: 80% × $109 = $87 (W7) | |||||
| NCI: 20% × $109 = $22 (W4) | |||||
| (W4) Non-controlling interest | |||||
| $ | |||||
| NCI fair value at acquisition (Sh5,000/5.5 op. rate) | 909 | ||||
| NCI share of post-acquisition profit (20% × (Sh2,200 (W2)/5.2 | 85 | ||||
| avg rate)) | 22 | ||||
| NCI share of exchange gain on retranslation of goodwill (W3) | |||||
| NCI share of exchange gain on retranslation of net assets (W7) | 76 | ||||
| –––– | |||||
1,092
––––
| (W5) Retained earnings | |
| $ | |
| Parent | 6,000 |
| Group share of post-acquisition profit | 338 |
| (80% × (2,200(W2)/5.2 avg. rate)) | |
| ––––– | |
| 6,338 | |
| ––––– | |
| (W6) Translation reserve | |
| $ | |
| Group share of goodwill forex (W3) | 87 |
| Group share of net assets and profit forex (W7) | 305 |
| ––––– | |
| 392 | |
| ––––– | |
| (W7) Forex on net assets and profit |
Net assets at acquisition (W2)
Retained profit for the year (W2)
Exchange gain
| Shillings | Rate | $ |
| 20,000 | 5.5 | 3,636 |
| 2,200 | 5.2 | 423 |
| bal fig | 381 |
––––– ––––
Closing net assets 22,200 5.0 4,440
––––– ––––
Note that the total exchange gain on retranslation of the opening net assets and profit must be allocated between the group and NCI based upon their respective shareholdings as follows:
Group: 80% × $381 = $305 (W6)
NCI: 20% × $381 = $76 (W4)
Test your understanding 2 – Saint and Albans
Saint Group
Note: The assets and liabilities of Albans have been translated at the closing rate.
| Group statement of financial position at 30 June 20X2 | |
| $ | |
| Goodwill (W3) | 2,700 |
| Loan to Albans ($1,400 – $1,400 interco) | Nil |
| Property, plant and equipment | 14,050 |
| ($10,000 + D14,500/4 + D1,000 (W2)/4 – D200 (W2)/4) | |
| Inventories ($5,000 + D4,000/4 – $400 (W8)) | 5,600 |
| Receivables ($4,000 + D500/4 + $1,500 (W10)) | 5,625 |
| Cash and cash equivalents ($1,600 + D560/4) | 1,740 |
| ––––– | |
| 29,715 | |
| ––––– | |
| $ | |
| Equity capital | 10,000 |
| Share premium | 3,000 |
| Retained earnings (W5) | 3,692 |
| Translation reserve (W7) | (2,773) |
| ––––– | |
| 13,919 | |
| Non-controlling interest (W4) | 2,046 |
| ––––– | |
| Total equity | 15,965 |
| Non-current liabilities ($5,000 + D5,460/4 + D140/4 – $1,400 | 5,000 |
| interco) | |
| Current liabilities ($5,000 + D1,000/4 + $2,000 (W9) + $1,500 | 8,750 |
| (W10)) |
–––––
29,715
–––––
Note: The income and expenses of Albans have been translated at the average rate for the year.
Group statement of profit or loss and other comprehensive income for the year ended 30 June 20X2
| $ | ||
| Revenue ($50,000 + D60,000/3 – $1,200 interco) | 68,800 | |
| Cost of sales | (29,667) | |
| ($20,000 + D30,000/3 + D200/3 (W2) + $400 (W3) + $400 | ||
| (W8) – $1,200 interco) | ––––– | |
| Gross profit | 39,133 | |
| Admin expenses ($20,000 + D12,000/3 + D140/3 (W2) + | (26,047) | |
| $2,000 (W9)) | ––––– | |
| Profit before tax | 13,086 | |
| Tax ($8,000 + D6,000/3) | (10,000) | |
| ––––– | ||
| Profit for the year: | 3,086 | |
| Other comprehensive income – items that may be reclassified | ||
| to profit or loss in future periods: | ||
| Exchange loss on translation of foreign subsidiary | (4,622) | |
| (($2,900) (W3) + ($1,722) (W6)) | ––––– | |
| Total comprehensive income for the year | (1,536) | |
| Profit for the year: | ––––– | |
| Attributable to Group (bal fig.) | 1,691 | |
| Attributable to NCI | 1,395 | |
| ((40% × (D11,660 (W2)/3 avg. rate)) – $160 GW impairment | ||
| (W3)) | ––––– | |
| 3,086 | ||
| ––––– | ||
| Total comprehensive income for the year: | $ | |
| Attributable to Group (bal fig.) | (1,082) | |
| Attributable to NCI | (454) | |
| ($1,395 profit – $1,160 (W3) – $689 (W6)) | ––––– | |
(1,536)
–––––
Workings
(W1) Group structure
S
60%
- NCI = 40% for complete year
(W2) Net assets of subsidiary in functional currency
| At acquisition Rep date Post-acq’n | |||
| D | D | D | |
| Equity capital | 1,000 | 1,000 | |
| Share premium | 500 | 500 | |
| Retained earnings | 500 | 12,500 | |
| Fair value adjustment – plant | 1,000 | 1,000 | |
| FVA – dep’n on plant (1/5) | (200) | ||
| Exchange loss on loan* | (140) | ||
| ––––– | ––––– | ––––– | |
| Post acquisition movement | 3,000 | 14,660 | 11,660 |
| ––––– | ––––– | ––––– | |
*Exchange loss on loan received by Albans
The loan was initially recorded at D5,460 ($1,400 × 3.9)
The loan needs to be retranslated using the closing rate to D5,600 ($1,400 × 4.0)
There is therefore an exchange loss of D140 (D5,600 – D5,460).
| Dr Profit or loss/retained earnings (W2) | D140 |
| Cr Non-current liabilities | D140 |
| (W3) Goodwill | ||||
| Goodwill calculation | ||||
| D | ||||
| Cost to parent ($5,000 × 2.0) | 10,000 | |||
| FV of NCI at acquisition | 5,000 | |||
| ––––– | ||||
| 15,000 | ||||
| FV of NA at acquisition (W2) | (3,000) | |||
| ––––– | ||||
| Full goodwill at acquisition | 12,000 | |||
| Impairment – 10% | (1,200) | |||
| ––––– | ||||
| Unimpaired goodwill at reporting date | 10,800 | |||
| ––––– | ||||
| Exchange gain (loss) on retranslation of goodwill | ||||
| D | Rate | $ | ||
| Goodwill at acquisition | 12,000 | 2.0 | 6,000 | |
| Impairment | (1,200) | 3.0 | (400) | |
| Exchange gain (loss) | Bal fig | (2,900) | ||
| ––––– | ––––– | |||
| Goodwill at reporting | 10,800 | 4.0 | 2,700 | |
| date | ––––– | ––––– | ||
The impairment loss on the goodwill is allocated between the group and NCI based on their respective shareholdings:
Group: 60% × $400 = $240 (W5)
NCI: 40% × $400 = $160 (W4)
The exchange loss on retranslation of goodwill is allocated between the group and NCI based on their respective shareholdings:
Group: 60% × $2900 = $1,740 (W7)
NCI: 40% × $2900 = $1,160 (W4)
| (W4) Non-controlling interest | ||||
| $ | ||||
| FV at acquisition per question (D5,000/2) | 2,500 | |||
| NCI % of post-acquisition profit | 1,555 | |||
| 40% × (D11,660/3 avg rate) (W2) | ||||
| NCI % of goodwill impairment (W3) | (160) | |||
| NCI % of retranslation loss on goodwill (W3) | (1,160) | |||
| NCI % of retranslation loss on net assets (W6) | (689) | |||
| ––––– | ||||
| 2,046 | ||||
| ––––– | ||||
| (W5) Group retained earnings | ||||
| $ | ||||
| Parent retained earnings | 4,000 | |||
| Government grant (W9) | (2,000) | |||
| Group share of goodwill impairment (W3) | (240) | |||
| Group share of post-acq’n profit | 2,332 | |||
| 60% × (D11,660/3 avg. rate) (W2) | ||||
| PURP (W8) | (400) | |||
| ––––– | ||||
| 3,692 | ||||
| (W6) Exchange differences on retranslation of net assets | ––––– | |||
| D | Rate | $ | ||
| Acquisition net assets | 3,000 | 2.0 | 1,500 | |
| Profit for year | 11,660 | 3.0 | 3,887 | |
| Exchange gain/(loss) | bal fig | (1,722) | ||
| ––––– | ––––– | |||
| Closing net assets | 14,660 | 4.0 | (3,665) | |
| ––––– | ––––– | |||
The exchange loss is allocated between the group and NCI based upon respective shareholdings:
Group: 60% × $1,722 = $1,033 (W7)
NCI: 40% × $1,722 = $689 (W4)
(W7) Translation reserve
$
Group share of forex on net assets and profit (W6) (1,033)
Group share of forex on goodwill (W3) (1,740)
–––––
(2,773)
–––––
(W8) PURP
The profit on the intra-group sale is $400 ((50/100) × $800).
All of these items remain in group inventory. Therefore the adjustment required is:
| Dr Cost of sales/retained earnings | $400 |
| Cr Inventories | $400 |
(W9) Government grant
This is a revenue grant. It should be recognised in profit or loss on a systematic basis. The grant is intended to cover training costs over a two year period and so it should be recognised in profit or loss over two years.
Saint should increase its expenses by $2,000 (1/2 × $4,000) and record the balance as deferred income on the SFP.
| Dr Administrative expenses/retained earnings | $2,000 |
| Cr Current liabilities | $2,000 |
(W10) Receivables factoring
The risks and rewards of ownership have not transferred from Saint to the factor so the receivable should not be derecognised. The proceeds received should instead be shown as a liability.
| The correcting entry is: | |
| Dr Receivables | $1,500 |
| Cr Liabilities | $1,500 |
Test your understanding 3 – LUMS Group
| $ | |
| Proceeds | 50,000 |
| Net assets recorded prior to disposal: | |
| Net assets | 20,000 |
| Goodwill | 10,000 |
| –––––– | |
| (30,000) | |
| Recycling of forex gains to P/L | 5,000 |
| –––––– | |
| 25,000 | |
| –––––– |
