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

Alpha, whose functional and presentation currency is the dollar ($), acquired 100% of Beta, a foreign subsidiary whose functional currency is the euro (EUR), on 1 January. Under IAS 21, how should goodwill arising on this acquisition be measured in Alpha's consolidated financial statements at the reporting date?

Goodwill on acquiring a foreign operation is treated as an asset of that operation, measured in its functional currency and translated at the closing rate each reporting date. Exchange differences are recognised in other comprehensive income and accumulated in equity, rather than being held at historical rate.

  1. AAs an asset of Beta, translated at the closing rate at each reporting dateCorrect
  2. BAs an asset of Alpha, held in dollars at the historical rate on acquisition date
  3. CAs an asset of Beta, translated at the average rate for the year
  4. DAs an asset of Alpha, retranslated at the closing rate with differences taken to profit or loss

Explanation

IAS 21 requires goodwill and fair value adjustments arising on acquiring a foreign operation to be treated as assets and liabilities of that foreign operation. They are expressed in the foreign operation's functional currency and translated at the closing rate. The resulting exchange differences go to other comprehensive income, not profit or loss or historical-rate treatment.

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