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CA Final · Financial Reporting · Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Sagar Industries Ltd (INR presentation currency) acquired 100% of Pacific Inc., a US subsidiary with USD functional currency, when the rate was ₹80. Goodwill of USD 50,000 arose on acquisition. At the reporting date the closing rate is ₹83 and the average rate for the year is ₹81.50. How should the goodwill be shown in the consolidated financial statements?

Goodwill is treated as an asset of the foreign operation and translated at the closing rate: USD 50,000 × ₹83 = ₹41,50,000. The increase of ₹1,50,000 over the acquisition-date value of ₹40,00,000 is an exchange difference recognised in other comprehensive income, not in profit or loss.

  1. A₹41,50,000, with the increase of ₹1,50,000 recognised in other comprehensive incomeCorrect
  2. B₹40,00,000, with no exchange difference because goodwill is a non-monetary asset
  3. C₹41,50,000, with the increase of ₹1,50,000 recognised in profit or loss
  4. D₹40,75,000, translated at the average rate, with the difference in other comprehensive income

Explanation

Goodwill arising on acquiring a foreign operation is treated as an asset of the foreign operation and expressed in its functional currency, USD, then translated at the closing rate. So it is 50,000 × 83 = ₹41,50,000. The opening value was 50,000 × 80 = ₹40,00,000, and the ₹1,50,000 difference goes to OCI (foreign currency translation reserve), not profit or loss.

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