Strategic Business Reporting (International) · Group accounting including statements of cash flows

Foreign Subsidiaries and IAS 21 in Group Accounting

Updated 11 October 2026 · Fact-checked

Under IAS 21 you first identify each entity's functional currency, then translate a foreign subsidiary into the group's presentation currency. Assets and liabilities go at the closing rate, income and expenses at transaction-date or average rates, and equity at historical rates. Goodwill is retranslated at the closing rate. The exchange differences go to OCI and build up in equity.

Understand Foreign Subsidiaries and IAS 21 in Groups

Every entity has a functional currency. This is the currency of the primary economic environment in which it operates. IAS 21 points to indicators: the currency that mainly influences sales prices, the currency of the main costs, the currency in which finance is raised, and how much of the entity's activity is an extension of the parent. A subsidiary can have a different functional currency from its parent. Management judgement is needed, and exam scenarios often give mixed indicators.

The presentation currency is the currency in which the financial statements are shown. An entity can choose any presentation currency. A group normally uses the parent's currency. If an entity's functional currency differs from the presentation currency, its results must be translated.

Translation is not the same as remeasurement. First, each entity records its own transactions in its own functional currency. Foreign currency monetary items are retranslated at the closing rate, and the differences go to profit or loss. Second, for consolidation, the subsidiary's statements are translated into the group presentation currency. Because this is a change of yardstick and not a real gain or loss, the exchange differences go to other comprehensive income and accumulate in a separate component of equity. They are reclassified to profit or loss only when the foreign operation is disposed of.

Goodwill and fair value adjustments arising on acquiring a foreign operation are treated as assets and liabilities of that foreign operation. They are expressed in its functional currency and retranslated at the closing rate each year. This creates an exchange difference on goodwill too. If NCI is measured at fair value, part of the goodwill difference belongs to NCI. If NCI is measured at the proportionate share of net assets, the goodwill difference belongs wholly to the parent.

If a foreign operation's functional currency is hyperinflationary, IAS 29 applies. You restate its statements first, then translate everything at the closing rate.

Key rules to remember

Translation rates (functional to presentation currency): Assets and liabilities: closing rate | Income and expenses: rate at transaction date (average rate if a fair approximation) | Equity: historical rates; Pre-acquisition equity is at the acquisition-date rate. Post-acquisition reserves are the translated profits of past years.
Using the rates: If the rate is quoted as foreign currency per $1, then $ amount = foreign amount ÷ rate; Check which way the rate is quoted before you start. Dividing by the wrong rate is a common slip.
Exchange difference on net assets: Exchange difference = closing net assets at closing rate − (opening net assets at opening rate + profit for the year at average rate − dividends at the rate on the dividend date); Use the same logic for any movement in net assets. It is a balancing figure that goes to OCI.
Goodwill of a foreign subsidiary: Goodwill (functional currency) = consideration + NCI − fair value of net assets at acquisition; carry at closing rate; Exchange difference on goodwill = closing goodwill at closing rate − goodwill at acquisition rate (less any impairment, translated at the average rate).
Sharing the exchange difference: NCI share = NCI % × exchange difference on net assets (plus a share of goodwill difference only if NCI includes goodwill); The rest goes to the parent's foreign exchange reserve.
Net investment in a foreign operation: Monetary item with no planned or likely settlement is part of the net investment: exchange difference in the individual entity's profit or loss → OCI in the consolidated statements; Reclassified to profit or loss on disposal of the foreign operation.

How to solve Foreign Subsidiaries and IAS 21 in Groups questions

Use the same sequence for any IAS 21 group question. It keeps the working tidy and picks up the method marks.

1Decide the functional currency of the subsidiary using the scenario's indicators. State the indicators you used and your conclusion. If it matches the parent's currency, treat transactions as the parent's and remeasure; if not, translate.
2List the rates you have: acquisition date, opening, average and closing. Check whether each is quoted as foreign per $1 or the other way round.
3Translate the statement of financial position. Assets and liabilities at closing rate. Share capital and pre-acquisition reserves at the acquisition rate. Post-acquisition reserves are the balancing figure or built up from translated profits.
4Translate the statement of profit or loss at the average rate (or actual rates for big items). Dividends go at the rate on the dividend date.
5Calculate goodwill in the functional currency, then translate at acquisition rate and at closing rate. The difference, adjusted for any impairment, is the exchange difference on goodwill.
6Calculate the exchange difference on net assets using the formula. Show opening net assets at opening rate, profit at average rate, and closing net assets at closing rate.
7Split exchange differences between the parent and NCI. Eliminate intragroup balances. For loans that form part of the net investment, move the individual entity's exchange difference from profit or loss to OCI.
8Complete the consolidation. Show the exchange differences in OCI and in the foreign exchange reserve. Add a short comment on judgement or ethics if the question asks for one.

Quickest way: Proof-based translation of net assets

When to use it: Use this when the question asks only for the exchange difference or the amount in OCI and reserves, and you do not need the full translated statements.

Work out opening net assets, profit and dividends in the functional currency. Check they add up to closing net assets.
Translate opening net assets at the opening rate, profit at the average rate and dividends at the dividend rate.
Translate closing net assets at the closing rate.
The difference is the exchange difference on net assets. A closing figure lower than the others means a loss.
Do the same for goodwill from acquisition rate to closing rate and add it.
Share the figures with NCI only where NCI holds a stake in that item.

Common mistakes in Foreign Subsidiaries and IAS 21 in Groups

Treating the translation difference as a gain or loss in profit or loss.
It looks like a normal foreign exchange difference, and students mix it up with IAS 21 transaction differences in individual entities.
Fix: Translation differences on a foreign operation go to OCI and equity. Only the retranslation of an entity's own foreign currency monetary items goes to profit or loss.
Translating all of the equity at the closing rate.
Students assume the translated balance sheet must balance without a separate figure.
Fix: Equity goes at historical rates. The exchange difference is the balancing figure and sits in its own reserve.
Leaving goodwill at the acquisition-date rate.
Goodwill is thought of as a parent asset in the parent's currency.
Fix: Goodwill is an asset of the foreign operation. Retranslate it at the closing rate every year and put the difference in OCI.
Multiplying instead of dividing by the rate, or the reverse.
Rates are quoted differently from question to question.
Fix: Write the rate with its units first. If it is 2 dinars per $1, a dinar amount is divided by 2.
Giving NCI a share of goodwill differences when NCI is at proportionate net assets.
Students apply the NCI percentage to every exchange difference automatically.
Fix: With the proportionate method NCI has no goodwill, so the goodwill difference is wholly the parent's. Share it only if NCI is at fair value.
Leaving an exchange loss on a long-term intragroup loan in consolidated profit or loss.
Intragroup balances are eliminated, so students expect no exchange effect to remain.
Fix: The difference does not cancel on consolidation. If settlement is neither planned nor likely, it is part of the net investment and is reclassified to OCI.

Worked examples

Example 1

Parent P has the $ as its functional and presentation currency. On 1 January 20X1 P bought 80% of S for D 3,600. S's functional currency is the dinar (D). S's net assets at that date were D 4,000, equal to fair value. NCI is measured at the proportionate share of net assets. In the year to 31 December 20X1 S made a profit of D 1,500 and paid no dividend, so closing net assets were D 5,500. Rates: 1 January 20X1 D 2.0 = $1; average D 2.25 = $1; 31 December 20X1 D 2.5 = $1. Calculate goodwill at 31 December 20X1 and the exchange differences arising on consolidation, and show who they belong to. Assume no impairment.

Show the solution

Goodwill in dinars = 3,600 + NCI (20% × 4,000 = 800) − 4,000 = D 400.
Goodwill at acquisition rate = 400 ÷ 2.0 = $200. At closing rate = 400 ÷ 2.5 = $160.
Exchange difference on goodwill = 160 − 200 = $40 loss. NCI is at proportionate net assets, so it has no goodwill and the whole loss belongs to P.
Net assets: opening 4,000 ÷ 2.0 = $2,000. Profit 1,500 ÷ 2.25 = $666.67. Total before exchange difference = $2,666.67.
Closing net assets = 5,500 ÷ 2.5 = $2,200.
Exchange difference on net assets = 2,200 − 2,666.67 = $466.67 loss.
NCI share = 20% × 466.67 = $93.33. P's share = 466.67 − 93.33 = $373.33.
P's share of exchange loss in OCI = 373.33 + 40 = $413.33. Total OCI loss = 506.67, of which NCI 93.33.

Answer: Goodwill at 31 December 20X1 is $160 (D 400 at 2.5). Exchange losses go to OCI: $40 on goodwill (all P) and $466.67 on net assets (P $373.33, NCI $93.33). P's foreign exchange reserve is debited with $413.33 and NCI bears $93.33.

Example 2

On 1 January 20X1 P (functional currency $) lent D 1,000 to its subsidiary S (functional currency dinar). Settlement is neither planned nor likely in the foreseeable future. The rate was D 2.0 = $1 on 1 January and D 2.5 = $1 on 31 December 20X1. Explain how P records the loan in its own books and how the exchange difference is treated in the consolidated financial statements.

Show the solution

In P's books the loan is a monetary receivable in a foreign currency. At 1 January it is D 1,000 ÷ 2.0 = $500.
At 31 December it is retranslated at the closing rate: D 1,000 ÷ 2.5 = $400.
P records an exchange loss of $500 − $400 = $100 in its own profit or loss.
In S's books the loan is a payable in S's own functional currency. S has no exchange difference.
On consolidation the loan and receivable are eliminated, but the $100 loss does not disappear. Because the loan is in substance part of the net investment, IAS 21 requires the difference to be recognised in OCI in the consolidated statements and accumulated in the foreign exchange reserve.
On disposal of S, the accumulated amount is reclassified from equity to profit or loss as part of the gain or loss on disposal.

Answer: P shows a $100 exchange loss in its own profit or loss. In the consolidated financial statements, the $100 loss is recognised in OCI, held in the foreign exchange reserve, and recycled to profit or loss on disposal of S.

Exam tips

Start every answer by naming the functional currency and the indicators from the scenario. This earns marks for applying the standard and shows professional judgement.
Show your rates and the direction of division on the face of the working. Marks are given for method even if you slip on arithmetic.
Always present the exchange difference as a separate working: opening net assets at opening rate, profit at average rate, closing net assets at closing rate. Do not force it out of the balance sheet.
Read the NCI method carefully. It decides who bears the exchange difference on goodwill.
Expect narrative parts such as explaining why exchange differences go to OCI, or why a loan is part of the net investment. Write two or three clear sentences with the principle and the scenario fact.

Practice questions from Group accounting including statements of cash flows

Foreign Subsidiaries and IAS 21 in Groups: frequently asked questions

What is the difference between functional currency and presentation currency?

Functional currency is the currency of the entity's main economic environment, and the entity measures its transactions in it. Presentation currency is the currency the financial statements are shown in. They can be different, and if they are, the results are translated.

Where do exchange differences on translating a foreign subsidiary go?

They go to other comprehensive income and accumulate in a separate component of equity. They are not recognised in profit or loss at translation. They are reclassified to profit or loss when the foreign operation is disposed of.

Do I retranslate goodwill every year?

Yes. Goodwill on a foreign subsidiary is treated as an asset of that subsidiary in its functional currency. You translate it at the closing rate each year, and the difference goes to OCI. Fair value adjustments are treated in the same way.

Which rate is used for the subsidiary's profit or loss?

Use the rate at the date of each transaction. In practice an average rate for the period is used if it is a reasonable approximation. Dividends are translated at the rate on the date they were declared or paid, as the question specifies.