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

Parent P (dollar functional currency) owns 100% of subsidiary S, whose functional currency is the euro. P has a €10m net investment in S and takes out a €8m euro-denominated loan, designated as a hedge of the net investment. During the year the loan shows an exchange loss of $0.6m, and the hedge is fully effective. On the €10m net investment, the translation gain is $0.9m. Which statement about the consolidated financial statements is correct?

Both the $0.6m exchange loss on the hedging loan and the $0.9m translation gain on the net investment are recognised in other comprehensive income and accumulated in the translation reserve, leaving a net $0.3m gain. This is how IFRS 9 treats the effective portion of a net investment hedge.

  1. AThe $0.6m loss is recognised in profit or loss and the $0.9m gain in other comprehensive income
  2. BThe $0.6m loss is recognised in other comprehensive income and held in the foreign currency translation reserve, offsetting part of the $0.9m gain, which is also in other comprehensive incomeCorrect
  3. CBoth are recognised in profit or loss as they offset
  4. DThe $0.6m loss is recognised in other comprehensive income but the $0.9m gain is recognised in profit or loss

Explanation

In a net investment hedge, the effective portion of the hedging instrument's gain or loss goes to OCI and accumulates in the translation reserve alongside the translation difference on the foreign operation. Net OCI is therefore a $0.3m gain. Both amounts are reclassified to profit or loss on disposal of S.

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