‘The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:
- assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
- income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
- all resulting exchange differences shall be recognised in other comprehensive income.’
An important additions is that for (b) it is also allowed to use a rate that approximates the exchange rates at the dates of the transactions, the average rate for the period (year, quarter, month). However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate [IAS 21.40].
Investor Company Ltd. (‘Parent’) formed Subsidiary Company Ltd.(‘Subsidiary’), a foreign operation, on 30 June 19X0. It subscribed the issued capital of FC100,000 and raised a further FC200,000 in the form of a 5 year loan (repayable in 5 equal annual instalments on 30 June of each year). Fixed assets of FC201,701 were also acquired on 30 June 19X0.
The exchange rates relevant to translating Subsidiary Company’s financial statements were as follows:
30 JUNE 19X0 FC1.0 = CU1.70
30 JUNE 19X1 FC1.0 = CU2.00
During the year to 30 June 19X1 a representative average exchange rate was FC1.0 = CU1.80.
The opening balance sheet shows as follows:
At 30 June 19X0, Investor Company would have consolidated the above balance sheet by simply eliminating the issued capital of Subsidiary Company against its investment in that company and aggregating all remaining line items (this is demonstrated below for the year ended 30 June 19X1). Consolidation of a foreign operation
YEAR ENDED 30 JUNE 19X1 Consolidation of a foreign operation
The consolidation worksheets for the two companies are shown for the period ending 30 June 19X1.
The eliminations can be analysed using the movements in the investment in the subsidiary and the movements in shareholders equity:
- Movements in subsidiary Consolidation of a foreign operation
On consolidation two retranslations show up: Consolidation of a foreign operation
- the recalculation of the share capital, invested at formation is FX100,000 (or then CU170,000), which amount increased to CU200,000 because the rate of exchange between FX/CU changed from 1.70 to 2.00, and
- the recalculation of the net profit of FX59,538 at average rate (1.80) in the income statement to closing rate (2.00) in the balance sheet/financial position, or recalculated: at closing rate FX59,538 at 2.00 is CU119,076 minus the average translation CU107,168 from the income statement is CU11,908.
- Movements in equity Consolidation of a foreign operation
A few comments/clarifications: Consolidation of a foreign operation
- The investment in the subsidiary is included in the equity of the parent (see balance sheet parent in consolidation working sheet) and in the subsidiary, combined this results in a double count, so CU 170,000 is eliminated, Consolidation of a foreign operation
- The same is more or less happening to the increase in the exchange rate (see above movements in subsidiary), elimination of CU 30,000,
- In the reporting line Net profit combined of CU 443,618, the net profit of the subsidiary is included in the net profit of the parent (CU 443,618 is CU 336,450 (CU 229,282 company profit parent and CU 107,168 company profit subsidiary (equity accounting)) AND CU 107,168 company profit subsidiary), so again double count, eliminate CU 107,168,
- The currency retranslation average to closing combined of CU 23,816 also is a double count (see reasonings above and consolidation working sheet details), eliminate CU 11,908.
See also: The IFRS Foundation