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ACCA Strategic Professional · Strategic Business Reporting (International) · Foreign transactions and entities

A parent's finance director proposes that goodwill on a foreign subsidiary be kept at its historical dollar amount to avoid reporting exchange losses in other comprehensive income, which would reduce equity and a covenant ratio. The subsidiary's functional currency has weakened significantly. What is the appropriate response under IFRS Accounting Standards and professional ethics?

The proposal should be rejected. IAS 21 requires goodwill of a foreign operation to be retranslated at the closing rate, with exchange differences in other comprehensive income. Avoiding this to protect a covenant would misstate the accounts and create an ethical threat to integrity and objectivity.

  1. AAccept the proposal because goodwill is a non-monetary item and historical cost applies
  2. BAccept it provided the amount is disclosed in the notes as an accounting policy choice
  3. CReject it; goodwill must be translated at the closing rate, and the pressure to manage a covenant is an ethical threatCorrect
  4. DReject it, but recognise the exchange loss in profit or loss rather than other comprehensive income

Explanation

IAS 21 requires goodwill of a foreign operation to be translated at the closing rate, with differences in other comprehensive income; there is no choice. Keeping historical rate to protect a covenant is a misstatement motivated by self-interest or intimidation, creating an ethical threat to objectivity and integrity. Recognising the loss in profit or loss is also wrong.

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