Strategic Business Reporting (International) · Foreign transactions and entities

Goodwill and Fair Value Adjustments of a Foreign Subsidiary

Updated 11 October 2026 · Fact-checked

Under IAS 21, goodwill and fair value adjustments from acquiring a foreign operation are treated as assets and liabilities of that operation. You measure them in its functional currency and retranslate them at the closing rate each year. The exchange differences go to other comprehensive income, not profit or loss.

Understand Goodwill and Fair Value Adjustments of Foreign Operations

When a parent buys a foreign subsidiary, it pays for net assets and goodwill. IAS 21 says goodwill and any fair value adjustments to the subsidiary's assets and liabilities are assets and liabilities of the foreign operation. They are not assets of the parent.

This means they are expressed in the subsidiary's functional currency. You calculate goodwill in that currency at acquisition. Then you translate it into the group's presentation currency at each reporting date using the closing rate. This is the same as for every other asset of the subsidiary.

The rate changes between dates. So the translated figure changes even though the foreign-currency amount is unchanged. That change is an exchange difference. It is recognised in other comprehensive income and accumulated in a separate component of equity, usually called the translation reserve. It is not in profit or loss.

If there is a non-controlling interest, how it is measured matters. Under the full goodwill method, goodwill includes the NCI share. So the exchange difference is split between the parent and the NCI. Under the proportionate method, goodwill relates only to the parent, so the whole difference goes to the parent's reserve.

Fair value adjustments work the same way. An uplift on land, for example, is retranslated at closing rate. Any extra depreciation on it is charged in the subsidiary's currency and translated at the average rate, as it is an expense of the year. Goodwill impairment is also tested in the foreign currency and translated at the average rate when charged. On disposal of the subsidiary, the accumulated differences are reclassified to profit or loss.

Key rules to remember

Goodwill at acquisition (functional currency): Goodwill = Consideration + NCI − Fair value of net assets at acquisition; Work it out in the subsidiary's currency. The NCI is either at fair value or at its proportionate share of net assets. The net assets are at fair value, including fair value adjustments.
Translation of goodwill: Goodwill in group currency = Goodwill in foreign currency ÷ closing rate; Rates are quoted as foreign currency per 1 unit of group currency. Divide if so, multiply if the rate is the other way round. Check the quote.
Exchange difference on goodwill: Difference = Closing goodwill at closing rate − (Opening goodwill at opening rate − Impairment at average rate); Use it as a balancing figure. Write it as a gain or loss in OCI. The impairment reduces goodwill, so it is deducted from the opening figure. The impairment itself is not part of the exchange difference.
Fair value adjustment treatment: FV adjustment at closing rate; extra depreciation at average rate; The same logic applies to the adjustment as to any asset of the foreign operation.
Allocation of the difference: Parent share = difference × parent %; NCI share = difference × NCI % (full goodwill method); Under the proportionate method, all goodwill differences go to the parent.

How to solve Goodwill and Fair Value Adjustments of Foreign Operations questions

Use this method for any question on goodwill or fair value adjustments of a foreign subsidiary. Keep everything in the foreign currency until the last step.

1Identify the subsidiary's functional currency and the group's presentation currency. Note whether rates are foreign per 1 of group currency.
2Calculate goodwill at acquisition in the subsidiary's functional currency: consideration, plus NCI, less fair value of net assets including fair value adjustments. If the parent paid in its own currency, translate the consideration into the functional currency at the acquisition-date rate first.
3Translate opening goodwill at the acquisition-date rate. Translate closing goodwill at the closing rate.
4Deduct any impairment in foreign currency. Translate it at the average rate for the year.
5Find the exchange difference as the balancing figure: closing goodwill at closing rate less (opening goodwill at opening rate less the impairment at average rate).
6Repeat for fair value adjustments: translate at closing rate and adjust for extra depreciation at average rate.
7Allocate the difference between the parent and the NCI where goodwill is at full value. Put the parent's share in the translation reserve and the NCI's share in NCI.
8Show the figures in the group statement of financial position and the OCI. Add a short explanation if the question asks for it.

Quickest way: Three-column goodwill table

When to use it: Use it when you are short of time and need the goodwill and exchange difference in one sweep.

Draw three columns: foreign currency, rate, group currency.
Fill the rows: goodwill at acquisition, impairment, goodwill at year end.
Use the acquisition rate for the opening row, the average rate for the impairment and the closing rate for the end row.
Take the opening row less the impairment row. This gives the expected closing figure at historic rates. The gap between it and the closing row is the exchange difference.
Put the difference in OCI. Split it by NCI share if goodwill is at full value.

Common mistakes in Goodwill and Fair Value Adjustments of Foreign Operations

Keeping goodwill at the historic acquisition-date rate
Students treat goodwill like a non-monetary asset of the parent that is held at historic cost.
Fix: IAS 21 treats goodwill as an asset of the foreign operation. Retranslate it at the closing rate at every reporting date.
Putting the exchange difference on goodwill in profit or loss
Students confuse it with a foreign currency transaction difference in an individual entity.
Fix: Differences on translating a foreign operation go to OCI and the translation reserve. They are reclassified only on disposal.
Translating goodwill impairment at the closing rate
Students apply the closing rate to everything related to goodwill.
Fix: An impairment is an expense of the year. Translate it at the average rate, or the rate at the date it arose, and put it in profit or loss. Let the balancing figure absorb the rest.
Calculating goodwill in group currency at the start
It feels easier to translate the net assets and the consideration first.
Fix: Calculate goodwill in the subsidiary's functional currency, then translate. This avoids hidden differences.
Giving the whole difference to the parent when goodwill is at full value
Students forget the NCI share of goodwill.
Fix: Check how the NCI is measured. Under the full method, allocate the difference by ownership percentages between the parent reserve and the NCI.
Ignoring fair value adjustments in the net assets
Students use the book value of the subsidiary's net assets given in the statement of financial position.
Fix: Add the fair value adjustments at acquisition. Then retranslate them at closing rate like other assets.

Worked examples

Example 1

Parent P bought 80% of Subsidiary S on 1 January 20X1 for 4,000,000 dinars (D). S's net assets at fair value on that date were D4,000,000. NCI is measured at its proportionate share of net assets. Rates: D5 = $1 at 1 January 20X1 and D4 = $1 at 31 December 20X1. There is no impairment. Calculate goodwill at acquisition and at year end in $, and the exchange difference.

Show the solution

Goodwill in D: 4,000,000 + NCI (20% × 4,000,000 = 800,000) − 4,000,000 = D800,000.
Under the proportionate method, goodwill relates only to the parent. Check: goodwill = consideration − parent share of net assets = 4,000,000 − (80% × 4,000,000) = 4,000,000 − 3,200,000 = D800,000. This agrees.
Opening goodwill in $: 800,000 ÷ 5 = $160,000.
Closing goodwill in $: 800,000 ÷ 4 = $200,000.
Exchange difference: 200,000 − 160,000 = $40,000 gain, shown in OCI.

Answer: Goodwill is D800,000. It is $160,000 at acquisition and $200,000 at year end. The $40,000 exchange gain goes to OCI and the translation reserve, all attributable to the parent.

Example 2

Parent H acquired 75% of foreign subsidiary F on 1 January 20X1. Goodwill is measured under the full method and is R600,000 at acquisition, including NCI. The question gives no information on the NCI's own share of goodwill, so assume it is 25%, in line with its ownership. At 31 December 20X1 an impairment of R60,000 is recognised. Rates: R3 = $1 at 1 January, R3.2 = $1 average for the year, R4 = $1 at 31 December. Calculate the closing goodwill in $, the impairment in $, the exchange difference and the NCI share of the difference.

Show the solution

Opening goodwill in $: 600,000 ÷ 3 = $200,000.
Impairment in $ at average rate: 60,000 ÷ 3.2 = $18,750.
Closing goodwill in R: 600,000 − 60,000 = R540,000.
Closing goodwill in $: 540,000 ÷ 4 = $135,000.
Exchange difference: 135,000 − (200,000 − 18,750) = 135,000 − 181,250 = −$46,250, a loss in OCI.
Allocation: the question gives no NCI share of goodwill, so we split by ownership, 75/25. If the NCI's goodwill were given (fair value of NCI less its share of net assets), you would split on that basis instead.
Parent share of the exchange loss: 75% × 46,250 = $34,687.50. NCI share: 25% × 46,250 = $11,562.50.
The impairment charge is separate from the exchange difference. It goes through profit or loss and is split on the same basis under the full method. Parent share: 75% × 18,750 = $14,062.50 to group profit. NCI share: 25% × 18,750 = $4,687.50 to NCI.

Answer: Closing goodwill is $135,000. The impairment is $18,750. The exchange loss in OCI is $46,250. Allocating by ownership (75/25, as no NCI goodwill share is given), $34,687.50 goes to the parent's translation reserve and $11,562.50 to NCI. The $18,750 impairment charge is split on the same basis: $14,062.50 to the parent's group profit and $4,687.50 to NCI.

Exam tips

Write the rate direction at the top of your answer. Marks are lost because students multiply when they should divide.
Show goodwill in the foreign currency first. The marker can then see the method even if a rate is wrong.
State the IAS 21 rule in one sentence: goodwill and fair value adjustments are assets of the foreign operation, retranslated at closing rate. This earns easy explanation marks.
If the requirement asks for an explanation, say that the differences go to OCI and are reclassified to profit or loss on disposal.
Check the NCI method in the question before you allocate the difference. It changes the answer.

Practice questions from Foreign transactions and entities

Goodwill and Fair Value Adjustments of Foreign Operations in other exams

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

ACCA Applied SkillsGoodwill and Fair Value Adjustments at Acquisition

Goodwill and Fair Value Adjustments of Foreign Operations: frequently asked questions

Why is goodwill of a foreign subsidiary retranslated?

IAS 21 treats goodwill and fair value adjustments as assets and liabilities of the foreign operation. They are expressed in its functional currency. So they are translated at the closing rate at each reporting date.

Where does the exchange difference on goodwill go?

It goes to other comprehensive income and builds up in the translation reserve in equity. Under the full goodwill method, part of it is allocated to the NCI. It moves to profit or loss only when the foreign operation is disposed of.

At which rate do I translate goodwill impairment?

An impairment is a charge for the year. Translate it at the average rate, or the rate on the date it arose. Then the exchange difference is the balancing figure.

Does this apply to fair value adjustments too?

Yes. A fair value uplift on an asset is retranslated at closing rate. Extra depreciation on the uplift is translated at the average rate. The differences go to OCI.