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ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

A UK parent has a wholly owned subsidiary in Eurozone whose net assets are €10,000,000. The rate moves from €1.25 per £1 at the start of the year to €1.30 per £1 at the end, with no change in net assets in euro. Using the closing rate method, what is the effect on the sterling value of net assets, and where is it reported?

Net assets fall by £307,692, from £8,000,000 to £7,692,308, because the euro weakened against sterling. Under IAS 21 the translation difference on a net investment in a foreign operation is recognised in other comprehensive income, not profit or loss.

  1. AA decrease of £307,692 recognised in other comprehensive incomeCorrect
  2. BA decrease of £307,692 recognised in profit or loss
  3. CAn increase of £307,692 recognised in other comprehensive income
  4. DA decrease of £300,000 recognised in other comprehensive income

Explanation

Opening: 10,000,000/1.25 = £8,000,000. Closing: 10,000,000/1.30 = £7,692,308. Decrease = £307,692. Under IAS 21 the translation difference on a foreign operation goes to other comprehensive income, not profit or loss.

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