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

Parent P has a foreign subsidiary S whose functional currency differs from P's presentation currency. P sells its entire holding in S and loses control. Under IAS 21, how should the cumulative exchange differences on S that were accumulated in a separate component of equity be treated in P's consolidated financial statements?

The cumulative translation differences held in equity are reclassified to profit or loss when the foreign subsidiary is disposed of and control is lost. They form part of the gain or loss on disposal, because IAS 21 requires recycling of these amounts rather than leaving them in reserves.

  1. AReclassified from equity to profit or loss on disposal, as part of the gain or loss on disposalCorrect
  2. BTransferred directly to retained earnings without passing through profit or loss
  3. CLeft permanently in the translation reserve within equity
  4. DIncluded in other comprehensive income again and not reclassified

Explanation

IAS 21 requires cumulative exchange differences relating to a foreign operation to be reclassified to profit or loss when the operation is disposed of, as part of the gain or loss on disposal. Leaving them in equity or moving them to retained earnings would avoid recognising them in profit or loss, which is not permitted.

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