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

Parent Orla has a foreign subsidiary Vega and must prepare group results before a bank covenant test. The finance director proposes to avoid recycling a large cumulative translation gain by delaying the formal share sale of Vega until after the year end, although Orla has already transferred control and all risks and rewards, and the buyer directs Vega's activities. Which view is most consistent with IFRS and ethical reporting?

Orla should judge loss of control by substance under IFRS 10, not legal title. If the buyer already directs Vega, control is lost and the translation gain is recycled to profit or loss in that period. Delaying it to protect a covenant would breach integrity and objectivity.

  1. AThe delay is acceptable because legal title has not passed, so the gain is not recycled this year
  2. BOrla should assess loss of control on substance under IFRS 10, recognise the disposal when control is lost, and recycle the gain then; deferring to manage covenant results would breach integrity and objectivityCorrect
  3. COrla may choose either year for recycling since IAS 21 gives a free policy choice
  4. DOrla should recycle the gain in equity only, to avoid any covenant effect

Explanation

Loss of control under IFRS 10 depends on power, exposure to returns and ability to use power, not legal title alone. If the buyer already directs Vega's relevant activities, control has been lost and the cumulative translation gain must be reclassified to profit or loss in that period. Timing the recognition to meet a covenant is a breach of the fundamental ethical principles of integrity and objectivity. IAS 21 offers no policy choice on timing.

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