Strategic Business Reporting (International) · Foreign transactions and entities

Disposal of a Foreign Operation and Net Investment under IAS 21

Updated 11 October 2026 · Fact-checked

When a group disposes of a foreign operation, IAS 21 requires the cumulative exchange differences held in equity to be reclassified from OCI to profit or loss. A monetary item that is in substance part of the net investment has its exchange differences in OCI in the consolidated accounts until disposal.

Understand Disposal of a Foreign Operation and Net Investment

A foreign operation, such as a subsidiary with a different functional currency, is translated into the group presentation currency. The exchange differences on translating its net assets and goodwill go to other comprehensive income (OCI). They build up in a separate component of equity, often called the translation reserve.

These gains and losses are not realised while you still own the operation. They only affect the group's net investment on paper. So IAS 21 keeps them out of profit or loss until you leave.

On disposal, the cumulative amount in equity is reclassified (recycled) from OCI to profit or loss. It is included in the gain or loss on disposal. Disposal includes sale, liquidation, repayment of share capital, or abandonment. A repayment of share capital counts only where it is a return of the investment. The same applies when you lose control, joint control or significant influence over the foreign operation.

Not every reduction in the carrying amount is a disposal. A write-down of the foreign operation's carrying amount, either because of its own losses or because of an impairment recognised by the investor, is not a partial disposal (IAS 21.49). Nothing is recycled in that case.

A net investment in a foreign operation is the reporting entity's interest in its net assets. It can include a monetary item (such as a loan) owed to or by the foreign operation, if settlement is neither planned nor likely in the foreseeable future. Normally an exchange difference on such a loan goes to profit or loss in the individual statements of the entity (parent or foreign operation) in which the difference arises. In the consolidated financial statements, it goes to OCI and is recycled on disposal. The individual statements of that entity still show it in profit or loss.

The loan can be denominated in the functional currency of either the reporting entity or the foreign operation (IAS 21.33). If it is in the functional currency of one side, only the other side's books show an exchange difference. If it is in a third currency, exchange differences arise in both entities' books. In each case the differences are treated in the same way in the consolidated accounts: they go to OCI and stay in the translation reserve until disposal.

Partial disposals matter. If control is lost, all the cumulative exchange differences are recycled. If control is kept (the parent sells part but still controls), the proportionate share of the cumulative difference is moved within equity to non-controlling interest (NCI) and not recycled. For a partial disposal of an associate or joint arrangement with significant influence kept, only the proportionate share is recycled.

Key rules to remember

Recycling on loss of control: Gain/loss on disposal = Proceeds + FV of any retained interest − Carrying amount of net assets (including goodwill) + Carrying amount of NCI derecognised + Parent's share of cumulative exchange differences (credit balance added, debit balance deducted); Only the parent's share of the cumulative exchange differences is recycled to profit or loss. The NCI share is derecognised within the NCI carrying amount and is not recycled. Add a cumulative credit balance to the gain. Deduct a cumulative debit balance. Net assets and goodwill are at the closing rate at the disposal date.
Partial disposal, control kept: Amount reattributed to NCI = Cumulative exchange differences × proportion of interest disposed; No recycling to profit or loss. It is a transfer within equity, as no control is lost.
Net investment loan exchange difference (individual books): Foreign currency loan × (closing rate − opening rate) = exchange difference in profit or loss of the entity; In the consolidated accounts, the difference is taken to OCI and kept in the translation reserve until disposal.
Translation of foreign subsidiary: Exchange difference = Closing net assets at closing rate − Opening net assets at opening rate − Profit at average rate; Add any adjustment for dividends or other equity movements at the rate used. Goodwill is also retranslated at the closing rate.

How to solve Disposal of a Foreign Operation and Net Investment questions

Use this method for any question on disposal of a foreign operation or a net investment loan.

1Identify the event: full disposal, loss of control, partial disposal keeping control, or no disposal at all.
2Check any intragroup monetary item. Decide if settlement is planned or likely. If not, it forms part of the net investment.
3Work out the exchange difference on the loan in the individual books (profit or loss), then reclassify it to OCI on consolidation if it is part of the net investment.
4Calculate the cumulative translation reserve at the disposal date, including goodwill, and split it between the parent and NCI.
5Translate the net assets and goodwill at the closing rate at the disposal date to get their carrying amounts.
6Compute the gain or loss on disposal, recycling the parent's share of the cumulative exchange differences from OCI to profit or loss.
7State where each item is shown: profit or loss, OCI, equity, and NCI. Add a one-line explanation of the IAS 21 rule.

Quickest way: Quick recycle check

When to use it: Use this when time is short and the question asks only for the gain on disposal or the effect on profit or loss.

Find the cumulative translation reserve attributable to the parent at the disposal date.
Add a credit balance (gain) to the disposal profit. Deduct a debit balance (loss).
Do not recycle if control is kept. Only move the share to NCI.
Include net investment loan differences already in the reserve. They are recycled too.

Common mistakes in Disposal of a Foreign Operation and Net Investment

Leaving cumulative exchange differences in equity after the sale.
Students treat OCI items as permanent, like revaluation surpluses on property.
Fix: Remember that IAS 21 requires reclassification on disposal. Recycled items go to profit or loss.
Recycling the whole reserve when the parent still controls the subsidiary after a partial sale.
Students see 'disposal' and apply the full-disposal rule.
Fix: Check control first. If control is kept, transfer the proportionate share to NCI and do not touch profit or loss.
Taking the exchange difference on a net investment loan to profit or loss in the consolidated accounts.
It is correct in the lender's own books, so students carry it into the group.
Fix: Show it in profit or loss in the individual entity. In the consolidation, reclassify it to OCI and accumulate it in equity.
Treating every intragroup loan as a net investment.
Students ignore the condition on settlement.
Fix: Only a loan with no planned or likely settlement in the foreseeable future qualifies. A loan due for repayment soon does not.
Forgetting goodwill when working out the carrying amount or the reserve.
Students focus on the subsidiary's net assets.
Fix: Goodwill of a foreign operation is an asset of that operation. Retranslate it at the closing rate and include its exchange difference.
Ignoring the NCI share of the reserve.
Students use the full reserve in the parent's gain calculation.
Fix: Split the reserve between the parent and NCI. Only the parent's share is recycled to profit or loss.

Worked examples

Example 1

Parent P owns 100% of foreign subsidiary S, whose functional currency is the dinar (D). P sells all of S on 31 December Year 5 for $3,000,000. At that date, the carrying amount of S's net assets including goodwill, translated at the closing rate, is $2,600,000. The translation reserve for S shows a credit balance of $150,000 at the disposal date. Calculate the gain on disposal in P's consolidated profit or loss.

Show the solution

Identify the event: full disposal, control lost, so the whole cumulative reserve is recycled.
Gain before recycling = Proceeds $3,000,000 − Carrying amount $2,600,000 = $400,000.
Cumulative exchange gain in equity = $150,000 credit. P owns 100%, so there is no NCI and the whole reserve is attributable to the parent. It is reclassified to profit or loss and increases the gain.
Total gain = $400,000 + $150,000 = $550,000.

Answer: The consolidated gain on disposal in profit or loss is $550,000. The $150,000 translation reserve is wholly attributable to P because it owns 100%. It is reclassified from OCI to profit or loss. The reclassification adjustment is shown in OCI as a deduction of $150,000 in the year of disposal.

Example 2

Parent P lent its 80%-owned foreign subsidiary S a loan of D1,000,000. Settlement is neither planned nor likely in the foreseeable future. P's functional currency is the dollar. S's functional currency is the dinar. The loan is denominated in dinars. The rate at 1 January was D4 = $1 and at 31 December was D5 = $1. Explain and calculate the exchange difference in P's individual statements and in the consolidated statements.

Show the solution

The loan is a monetary item with no planned settlement, so it forms part of the net investment in S.
Value at 1 January = D1,000,000 ÷ 4 = $250,000.
Value at 31 December = D1,000,000 ÷ 5 = $200,000.
The dinar weakened, from D4 to D5 per $1. P holds a dinar receivable, so it has a loss. Exchange loss in P's individual books = $250,000 − $200,000 = $50,000, in profit or loss.
The loan is in S's own functional currency, the dinar. S's payable stays at D1,000,000, so S's own books show no exchange difference on the loan.
On consolidation, the loan balances are eliminated. Under IAS 21.32, the $50,000 loss in P's profit or loss is reclassified to OCI and accumulated in the translation reserve.
The $50,000 loss arises in P's own books, and S has no matching difference in its books. So the NCI does not share in it, and it is attributed to the owners of the parent. This is a consequence of where the difference arises, not an IAS 21 rule. The translation of S's own net assets is a separate calculation and is not covered in this example.
The $50,000 stays in the translation reserve until disposal of S. On disposal, it is recycled to profit or loss.

Answer: P's individual profit or loss shows an exchange loss of $50,000. S shows no exchange difference on the loan. In the consolidated statements, the $50,000 loss is reclassified to OCI and held in equity. It is attributed to the owners of the parent because it arises in P's own books and S has no matching difference, so the NCI does not share in it. It is reclassified to profit or loss when S is disposed of.

Exam tips

Always state the rule in words: 'cumulative exchange differences are reclassified from equity to profit or loss on disposal under IAS 21'. The marks are in the explanation.
Read for the words 'settlement is neither planned nor likely'. They signal a net investment loan.
Check whether control is lost. The answer changes between full recycling, NCI transfer and no recycling.
Show the reclassification adjustment in OCI as well as the credit to profit or loss. Students often forget the OCI side.
Add a professional skills point if asked to advise the board: explain clearly why the profit on disposal includes a non-cash recycled amount.

Practice questions from Foreign transactions and entities

Disposal of a Foreign Operation and Net Investment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalDisposal of Foreign Operation and Disclosures

Disposal of a Foreign Operation and Net Investment: frequently asked questions

What happens to exchange differences in equity when a foreign subsidiary is sold?

IAS 21 requires the cumulative exchange differences in equity to be reclassified to profit or loss when the foreign operation is disposed of. The amount is included in the gain or loss on disposal. The parent's share is recycled and the NCI share is derecognised.

What is a net investment in a foreign operation?

It is the reporting entity's interest in the net assets of the foreign operation. It can include monetary items, such as a loan, where settlement is neither planned nor likely in the foreseeable future. Exchange differences on such items go to OCI in the consolidated accounts.

Is the exchange difference on a net investment loan in profit or loss or OCI?

It depends on whose statements you are preparing. In the individual statements of the entity holding the loan, it is in profit or loss. In the consolidated statements, it is reclassified to OCI and accumulated in equity until disposal.

Are exchange differences recycled on a partial disposal?

It depends on what is lost. If control is lost, all the cumulative differences are recycled. If the parent keeps control, the proportionate share is reattributed to NCI and nothing is recycled to profit or loss.