03. Reporting o/s transactions Flashcards
(36 cards)
When is IAS21 Effects f changes in Foreign Exch rate applicable?
- in accounting for transactions and balances in foreign currencies, except for those covered by IFRS 9
- In translating results and fin position of foreign operations inc in FS of entity (either by consolidation or equity method)
- in translating entity’s results and fin position into presentation currency
What is the historic rate (HR)?
Rate in place at date the transaction takes place
Also known as spot rate
What is the spot rate?
Same as historic rate
Rate at date transaction takes place
What is the closing rate?
Rate at reporting date
What are monetary assets/liabilities
Items that represent right to receive or obligation to pay cash
What are non-monetary assets/liabilities?
Items that give no right to receive or deliver cash e.g. PPE/ inventory
What is a functional currency?
Currency of the primary economic env in which entity operates
What is the presentational currency?
Currency in which FS are presented
What are the 2 types of indicators for determining the functional currency?
Primary
Secondary
IAS21 also provides 4 additional factors to consider when deciding whether o/s operation has the same functional currency as parent company
What are the primary indicators when determining the functional currency?
- Currency
a) that mainly influences sales price for g/s (often currency they are sold/settled in) AND
b) of the country whose competitive forces and regulations mainly determine the sales price of the G/S - Currency that mainly influences labour, material and other costs of providing g/s
Basically- costs they buy and sell in!
What are the secondary indicators when determining the functional currency?
- Currency in which funds for financing activities are generated
- Currency in which receipts from operating activities are retained
What are the 4 additional factors when considering whether an o/s operation has the same functional currency as parent company?
- Whether o/s comp is just an extension of reporting entity (has no autonomy)
- Whether intercomp transactions w parent are a high % of the o/s operations turnover
- Whether CF from o/s operations are remitted to parent
- Whether CF from o/s activities are sufficient to fund t, without funds being made available from the parent
Individual comp translating transactions:
How should transactions be initially dealt with?
- Translate using the historic rate prevailing at transaction date
- Average rate can be used if doesn’t fluctuate significantly in acc period
Individual comp translating transactions:
How are settled transactions dealt with?
Settled = payment/receipt occurs
- Translate it at the date of payment/receipt using the historic rate prevailing at that date
- If this is diff to original transaction, exch diff will occur (post to P&L)
Individual comp translating transactions:
How are unsettled transactions dealt with in acc if they are monetary items?
- Creates an outstanding A/L in SFP
- If it is a monetary item:
> retranslate at closing rate, put movement to P&L
> If exch diff relates to trading transactions, disclose within other operating income/ operating expenses
> If exch diff relates to non-trading transactions, it is disclosed within interest receivables and similar income/finance costs
Individual comp translating transactions:
How are unsettled transactions dealt with in acc if they are non-monetary items?
- Creates an outstanding A/L in SFP
- Cost model: NMI that are held at cost and initially translated at HR and carried fwd at this value. They are not retranslated
- FV model: If held at FV, is initially translated at HR and retranslated at spot rate at the date the FV is determined
- If the change in FV of item is recog directly in equity, then any related exch diffs are also recog directly in equity (e.g. revalued PPE)
- If change in FV is recog in SPL, any related exch diffs are also recog in SPL
What are the 2 main areas where measuring FV could be an issue?
- Inventory (valuing at lower of cost v NRV - cost is @ HR but NRV is at CR
- Impairments - comparing carrying value v recoverable amount, carrying value @ HR (unless prev revalued) but recoverable amount @ CR
How are each of the following translated on SFP?
Assets
Share Capital
Pre-Acq reserves
Post acq reserves
Equity (Net Assets at ye) (total - no ans)
Liabilities
Assets - CR
Share Capital - HR
Pre-Acq reserves - HR
Post acq reserves - Bal figure, includes all forex g/l from translation since acqu and post-acq profits. Exch diff can be recorded separately in a ‘translation reserve’ if desired
Equity (Net Assets at ye) (total - no ans)
Liabilities - CR
How are income and expense in SPL translated?
All translated at AR
What exchange diffs arise on translation of a subsidiary?
and how is it calculated?
- Diffs from translation of SPL at average rate and translation of A/L at CL rate
- Diffs on opening net assets retranslated at new closing rate
Calculated as:
Op NA - trans @ CR x
Op NA - trans @ OR (X)
= X
Prof for year - trans @ CR X
Profit for year - trans @ AR (X)
= X
Exch diff from translating sub X
This diff arising on translation is reported in OCI and held in equity
How do you consolidate o/s subsids (especially GW)?
Translate into sterling, then consolidate as normal
But there will be an exch diff arising from the treatment of goodwill
As GW is an asset of sub so must be re-translated each year at CR
Why does GW translation for o/s subsid consolidation create an exch diff?
How is the exch diff calculateD?
As GW is an asset of sub so must be re-translated each year at CR
Gives rise to further exch diff which is held in equity
Exch diff calc’ed as:
1. Calc GW in foreign currency
2. Translate at historic rate (acq date)
3. Translate GW at CR
4. Dif between HR and CR is added onto parent comp’s share of exch diff on nNA of subsid (assuming proportionate method is used to value GW)
Where is the exch diff on GW between opening and closing SFP shown?
Shown as OCI
How are statement of cash flows dealt with for o/s subsid consolidation?
IAs 7 requires CF associated with foreign currency transactions to be recorded at each rate on date of cash flow
