ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments
Omega Group, whose functional and presentation currency is the dollar, owns 100% of a foreign subsidiary with net assets of 50m euro. Omega borrows 30m euro and designates the loan as a hedge of part of its net investment in the subsidiary. In the year the euro strengthens, giving an exchange loss of $1.2m on the loan. The change in the retranslated 30m euro portion of the net investment is a gain of $1.2m. In the consolidated financial statements, what is the correct treatment?
The $1.2m loan exchange loss is recognised in other comprehensive income, offsetting the $1.2m translation gain on the net investment. Net investment hedge accounting takes the effective portion to OCI, and both amounts are reclassified to profit or loss when the foreign operation is disposed of.
- ALoss of $1.2m in profit or loss and gain of $1.2m in OCI
- BBoth the loss on the loan and the gain on the net investment recognised in profit or loss
- CLoss of $1.2m in OCI, offsetting the $1.2m gain on translation in OCI, with both reclassified to profit or loss on disposal of the subsidiaryCorrect
- DLoss of $1.2m deferred as an asset in the statement of financial position until the loan is repaid
Explanation
For a hedge of a net investment, the effective portion of the hedging instrument's gain or loss goes to OCI (foreign currency translation reserve), alongside the translation difference on the net investment. Both are reclassified on disposal. Taking the loan loss to profit or loss would create the mismatch hedge accounting avoids.
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