ACCA Strategic Professional · Strategic Business Reporting (International) · Foreign transactions and entities
Parent P has a foreign subsidiary S whose functional currency is the dinar. P consolidates S, and exchange differences on translating S's net assets have accumulated in a separate component of equity. P sells its entire interest in S. Under IAS 21, how should the cumulative exchange differences relating to S be treated in P's consolidated financial statements?
The cumulative translation differences are reclassified from equity to profit or loss when the gain or loss on disposal is recognised. IAS 21 treats them as part of the disposal result, so they cannot stay in reserves or go straight to retained earnings.
- AReclassified from equity to profit or loss when the gain or loss on disposal is recognisedCorrect
- BTransferred directly to retained earnings without passing through profit or loss
- CLeft in the translation reserve indefinitely
- DOffset against goodwill recognised on the original acquisition
Explanation
IAS 21 requires cumulative exchange differences in other comprehensive income relating to a foreign operation to be reclassified to profit or loss on disposal, as part of the gain or loss on disposal. Moving them to retained earnings would bypass profit or loss, which is not permitted.
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