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

Parent P holds 100% of foreign subsidiary S. During the year P's finance director proposes to avoid recognising a large cumulative translation loss by describing a planned sale of S as a 'restructuring of equity holdings' and recording the reserve transfer directly to retained earnings at disposal, which would improve reported profit. Which response is most consistent with IFRS and professional ethics?

The proposal should be rejected. IAS 21 requires cumulative translation differences to be reclassified to profit or loss on disposal of the foreign operation, and bypassing this to flatter profit would be misleading and breach the accountant's duty of integrity and professional behaviour.

  1. AAccept, because reserve transfers are a matter of management policy choice
  2. BAccept, provided the retained earnings movement is disclosed in the notes
  3. CReject, because IAS 21 requires the cumulative loss to be reclassified to profit or loss on disposal, and reporting otherwise would be misleading and breach the integrity principleCorrect
  4. DReject only if the auditors raise a query

Explanation

IAS 21 gives no choice: cumulative exchange differences are reclassified to profit or loss on disposal. Bypassing this to manage profit would be misleading, contravening the fundamental principles of integrity and professional behaviour. Note that the proposal here would actually report a higher profit than required, as the loss is a debit.

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