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Content
30.2.2.2 Assessment of functional currency.
30.2.2.2.1 Steps involved in determining functional currency.
30.2.2.2.1.1 Review the primary indicators.
30.2.2.2.1.2 Review the secondary indicators (if required)
30.2.2.2.1.3 Review additional factors where still in conclusive from step 1 and 2.
30.2.2.3 Definition of foreign operation.
30.2.2.4 Requirements to review each entity individually.
30.2.2.5 Examples of determining a functional currency.
30.2.2.5.1 Intermediary holding company.
30.2.2.5.2 Function currency – foreign currency sales.
30.2.2.6 Rules with regard to a change in functional currency.
30.3.1 Extract from FRS102: Section 30.6 -30.11.
30.3.2.1.1 Definition of monetary items.
30.3.2.1.2 Examples of monetary items.
30.3.2.1.3 Recognition of monetary items.
30.3.2.1.3.1 Initial recognition.
30.3.2.1.3.1.1 Determining the date of the transaction.
30.3.2.1.3.1.2 Rules for using average rate as approximation for actual spot rate.
30.3.2.1.3.2 Subsequent measurement
30.3.2.1.3.2.1 The two exceptions to retranslating monetary assets at period end rate.
30.3.2.1.3.3 Retranslation of monetary asset – purchase.
30.3.2.1.3.4 Retranslation of monetary asset – sale.
30.3.2.2.1 Definition of non-monetary items.
30.3.2.2.1.1 Examples of non-monetary items.
30.3.2.2.2.1. Non-monetary assets not fair valued.
30.3.2.2.2.1.1 Initial recognition.
30.3.2.2.2.1.2 Subsequent measurement
30.3.2.2.2.1.4.2 Retranslation of non-monetary asset – impairment of asset
30.3.2.2.2.2 Non-monetary assets fair valued.
30.3.2.2.2.2.1 Initial recognition.
30.3.2.2.2.2.2 Subsequent measurement
30.4 Net investment in a foreign operation.
30.4.1 Extract from FRS102: Section 30.12 -30.13.
30.4.2.1 Definition of net investment in a foreign operation.
30.4.2.2 Requirements for the net investment in a foreign operation treatment
30.4.2.3 Accounting for a net investment in a foreign operation.
30.4.2.3.1 Individual entity financial statements.
30.4.2.3.2 Consolidated financial statements.
30.4.2.4 Example – Net investment in a foreign operation.
30.5 Change in functional currency.
30.5.1 Extract from FRS102: Section 30.14 -30.16.
30.5.2.1 When can a change in functional currency arise.
30.5.2.1.1 Change in functional currency due to a change in circumstances.
30.5.2.1.2 Change in functional currency due to an error
30.5.2.2 How to account for a change in functional currency due to a change in currency.
30.6 Use of a presentation currency other than the functional currency.
30.6.1 Extract from FRS102: Section 30.17-30.21.
30.7 Translation of a foreign operation into the investor’s presentation currency.
30.7.1 Extract from FRS102: Section 30.22-30.23.
30.7.2.1.1 Treatment of amount recognised in OCI on future disposal
30.7.2.2 Goodwill recognized on acquisition of a foreign operation.
30.8.1 Extract from FRS102: Section 30.24 -30.27.
30.8.2.3 Notes to the financial statements.
30.8.2.3.1 Extract from the financial statements – operating profit note.
30.8.2.3.3 Example of a Prior year adjustment due to a change in functional currency.
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30.4 Net investment in a foreign operation
30.4.1 Extract from FRS102: Section 30.12 -30.13
30.12 An entity may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation and is accounted for in accordance with paragraph 30.13. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables
30.13 Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate, except that any unrealised gain shall be recognised in other comprehensive income. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised in other comprehensive income and accumulated in equity. They shall not be recognised in profit or loss on disposal of the net investment.
30.4.2 OmniPro comment
30.4.2.1 Definition of net investment in a foreign operation
The net investment in a foreign operation is defined in Appendix I of FRS 102 as ‘the amount of the reporting entity’s interest in the net assets of that operation’. In effect this includes monetary items that are payable or receivable from or to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future (often referred to as ‘permanent as equity’ loan) Note this treatment is not permitted to be used for trade debtor or creditor balances as stated in Section 30.12 of FRS 102.
30.4.2.2 Requirements for the net investment in a foreign operation treatment
In order for the treatment to occur, there must be some supporting documentation i.e. board minutes to substantiate that the loan will not require settlement in the foreseeable future. In effect this loan is akin to a capital contribution by the company paying the loan. So, if for example the loan conditions said it was repayable in 30 years time this would not meet the condition to be treated as permanent as equity as the settlement is planned in the future. If further conditions are then added to the loan to say that this loan no longer matures in 20 years time and is not repayable in the foreseeable future, it is likely this treatment will be obtained as under Section 22 of FRS 102 it can be treated as equity.
If the loan only becomes repayable on sale of the foreign operation this would meet the condition.
As these types of loans are monetary assets, the assets/liabilities must be retranslated at each period end using the year end spot rate as stated in Section 30.9 of FRS 102.
30.4.2.3 Accounting for a net investment in a foreign operation
30.4.2.3.1 Individual entity financial statements
The way in which a net investment should be treated in the individual financial statements of the entity that takes the foreign exchange risk is the same as any other monetary asset:
- The foreign exchange loss/gain as a result of retranslating the asset to the year end rate is posted to the profit and loss account as an unrealised foreign exchange loss/gain.
30.4.2.3.2 Consolidated financial statements
However in the consolidated financial statements the foreign exchange gain/loss recognised in the individual entity financial statements is posted to other comprehensive income (i.e. Taken out of the profit and loss account). Therefore this is only applicable where consolidated accounts are prepared.
Where it becomes evident that a loan previously repayable is not likely to be repayable in the foreseeable future, the exchange gain on the loan that is posted in the consolidated accounts to OCI is the exchange rate on the date the loan conditions changed to the year end.
30.4.2.4 Example – Net investment in a foreign operation
Example 10: Net investment in a foreign operation
Parent A loaned CU100,000 to Sub A on 1 February (Sub A has a functional currency in FC) which is neither planned nor likely to occur in the foreseeable future, so the entity is regarded as a net investment in a foreign operation. The foreign exchange rate at the date of receipt by Sub A was FC1=CU1.20. The spot rate at 31 December is FC1=CU1.15 and the year end for both companies is 31 December. Assume the average rate in the year was FC1=CU1.17. The journals to be posted for FX are:
Sub A
| FC | FC | |
| Dr Bank | 83,333 | |
|
Cr Amounts Due to Parent A (CU100,000/1.2) |
83,333 |
Being journal to reflect receipt of loan at transaction date
At year end
| FC | FC | |
| Dr FX Loss P&L | 3,623 | |
|
Cr Amounts Due to Parent A ((CU100,000/1.15)=FC86,956-FC83,333) |
3,623 |
Being journal to reflect unrealised FX loss due to retranslation to year end rate
Parent A
No FX effect as it was issued in CU.
Consolidated accounts
| CU | CU | |
| Dr Unrealised FX in OCI | 4,239 | |
|
Cr FX in Profit and Loss (FC3,623*1.17) |
4,239 |
Being journal to reclassify the FX loss from P&L to OCI assuming average rate for the year was used in the consolidation. This would then be recognised in a separate component in equity.
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Examples
Example 1: Intermediary holding company.
Example 2: Intermediate holding Company.
Example 3: Intermediate holding Company.
Example 4: Functional currency.
Example 5: Functional currency.
Example 6: Retranslation of monetary asset – purchase.
Example 7: Retranslation of monetary asset – sale.
Example 8: Retranslation of non-monetary asset
Example 9: Retranslation of non-monetary asset – impairment of asset
Example 10: Net investment in a foreign operation.
Example 11: Change in functional currency due to a change in circumstances.
Example 12: Presentational currency.
Example 13: Consolidation of a foreign operations results.
Example 14: Extract from notes to the accounting policies.
Example 16: Example of a Prior year adjustment due to a change in functional currency.
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