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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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30.7 Translation of a foreign operation into the investor’s presentation currency
30.7.1 Extract from FRS102: Section 30.22-30.23
30.22 In incorporating the assets, liabilities, income and expenses of a foreign operation with those of the reporting entity, the entity shall follow normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see Section 9 Consolidated and Separate Financial Statements) and the translation procedures set out in paragraphs 30.17 to 30.21. An intragroup monetary asset (or liability), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements. This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations. Accordingly, in the consolidated financial statements, a reporting entity continues to recognise such an exchange difference in profit or loss or, if it arises from the circumstances described in paragraph 30.13, the entity shall recognise it in other comprehensive income.
30.23 Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus, they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraph 30.18.
30.7.2 OmniPro comment
30.7.2.1 The Rules
As per Section 30.22 of FRS 102, the retranslation of the functional currency of a foreign operation into a presentational currency for consolidated financial statement purposes should follow the guidance in Section 30.17 to 30.21 of FRS 102. See 30.6.2 for application of the above guidance. Any foreign exchange intercompany transactions are recogmised in the consolidated income statement unless they relate to the retranslation of a balance which meets the requirements of a net investment in a foreign operation (see requirements at 30.4.2)
The presentation currency here is likely to be the functional currency of the parent but may not always be the case. Retranslation adjustments of the foreign operation are posted to other comprehensive income (OCI).
30.7.2.1.1 Treatment of amount recognised in OCI on future disposal
On disposal of a foreign operation, the amounts recognised remains in OCI, they are not recycled to the profit and loss account.
30.7.2.2 Goodwill recognized on acquisition of a foreign operation
As per Section 30.23 of FRS 102 goodwill on the acquisition of a foreign operation and any changes to the fair value adjustments to the carrying amount of the assets and liabilities of the foreign operation must be treated as a foreign asset for consolidated financial statement purposes and therefore the carrying amount must be retranslated at the closing exchange rate at the period end date of the parent company. See example of same at 30.7.2.3
30.7.2.3 Examples
See the example below which illustrates the guidance in Sections 30.22 and 30.23 of FRS 102
Example 13: Consolidation of a foreign operations results
If we take example 12 above where we retranslated the subsidiaries FC functional accounts to a presentation currency of CU and now incorporate this into the consolidated financial statements of Company A. In accordance with Section 30.23 any goodwill arising on acquisition of Company B is treated as the assets and liabilities of the foreign operation. Therefore applying this to the example 12 where goodwill of FC50,000 was recognised. In the consolidated financial statements of Company A, this goodwill would have been recognised on 1 January 2014 at the rate on the date i.e. CU40,000 (FC50,000*0.8). The total consideration paid in CU was CU160,000 (FC200,000*0.8)
If we assume the parent company’s balance sheet is simple and only holds an investment in Company B with no costs or income. Then the parent entity balance sheet would look as follows:
Financial assets CU160,000
Ordinary shares CU160,000
In the consolidated financial statements goodwill would have to be restated as follows (excluding amortisation)
Goodwill of FC50,000 retranslated at opening rate of CU1=USFC0.80 = CU40,000
Goodwill of FC50,000 retranslated at closing rate of CU1=USFC0.85 = CU42,500
Exchange gain to be added to goodwill & included in OCI CU2,500
Plus exchange difference posted on retranslation of Company B’s
financials statements from USD to CU (see example 12 above) CU15,000
Total exchange gain difference posted to OCI in consolidated CU17,500
balance sheet
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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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