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

Parent P (dollar functional currency) has lent 5 million francs to foreign subsidiary S (franc functional currency). Settlement is neither planned nor likely in the foreseeable future. In P's separate financial statements, the loan gave rise to an exchange gain of $40,000 for the year. S is wholly owned and consolidated. Which statement correctly describes the consolidated treatment, and the treatment on later disposal of S?

In consolidation the $40,000 is taken to other comprehensive income and accumulated in the translation reserve, because the loan forms part of the net investment. On disposal of the subsidiary it is reclassified to profit or loss together with the other cumulative exchange differences.

  1. AThe $40,000 is recognised in profit or loss in consolidation, and nothing is reclassified on disposal
  2. BThe $40,000 is recognised in other comprehensive income in consolidation and accumulated in equity; it is reclassified to profit or loss on disposal of SCorrect
  3. CThe $40,000 is eliminated against goodwill and never affects profit or loss
  4. DThe $40,000 is recognised in profit or loss in consolidation, and on disposal it is reclassified to retained earnings

Explanation

The loan is part of the net investment in a foreign operation (IAS 21). The gain is in profit or loss in P's separate statements but in consolidation is recognised in OCI and accumulated in equity. On disposal of S it is reclassified to profit or loss with the other cumulative differences. Leaving it in profit or loss in consolidation ignores the net investment rule.

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