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

Garo, a dollar-reporting parent, sells its 100% foreign subsidiary (functional currency the rand) and loses control. The cumulative exchange differences on translation in equity amount to a $300,000 credit. What is the required treatment under IAS 21 on disposal?

The cumulative $300,000 translation gain is reclassified from equity to profit or loss on disposal, forming part of the gain or loss on sale. IAS 21 requires this recycling when control of a foreign operation is lost, so it cannot stay in reserves or go straight to retained earnings.

  1. AReclassify the $300,000 from equity to profit or loss as part of the gain or loss on disposalCorrect
  2. BLeave the $300,000 permanently in other comprehensive income reserves
  3. CTransfer the $300,000 directly to retained earnings without going through profit or loss
  4. DDeduct the $300,000 from the consideration received to adjust the sale proceeds

Explanation

On disposal of a foreign operation with loss of control, the cumulative translation differences recognised in OCI are reclassified to profit or loss as part of the gain or loss on disposal. Leaving them in equity or transferring them directly to retained earnings is not permitted under IAS 21.

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