GROUP ACCOUNTING – FOREIGN CURRENCY 4/30/2024

Introduction
 Learning Objectives
Outline the principles for
GROUP ACCOUNTING – FOREIGN CURRENCY translating foreign currency
amounts
Apply these principles and
Account for the consolidation of
foreign operations
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Introduction Multinational corporation

 This is a company engaged in producing and
Entities when looking for selling goods or services in more than one
growth may expand internally, country. E.g Lafarge
 It consists of a parent company located in the
or by acquisition . home country and has subsidiaries in other
countries.
They may chose to form  All these companies in the group will trade in
the currency of the country were they operate .
multinational companies.  The parent company is required to produce
consolidated financial statements in one
currency.

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Accounting Standard for

Accounting for Multinational s
 IAS 21 “Effect of Changes in Foreign
exchange rates”. Provides guide lines on
foreign operations. It deals with:
 The definition of functional and
presentation currencies
 Accounting for individual transactions
in a foreign currency
 Translating the financial statements of a
foreign operation
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Foreign Operation
 IAS 21 defines Foreign Operation as;
 An entity that is a subsidiary
,associate ,joint arrangement or
branch of a reporting entity the
activities of which are based or
conducted in a currency other than
those of the reporting entity.
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GROUP ACCOUNTING – FOREIGN CURRENCY
Functional currencies
 IAS 21 defines the functional currency
as the currency of the primary economic
environment where the entity operates.
In most cases this will be the local
currency.
 The entity maintains its day-to-day
financial records in its functional
currency.
 E g Zambian Kwacha for Lafarge Zambia
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Foreign Currency
 IAS 21 defines foreign Currency as ;
 A currency other than the
functional currency of the entity.
 Any transaction in foreign
currency is a foreign currency
transaction
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Example
 Shoprite Zambia does its business
in ZMK its parent company African
Super Markets is in South Africa
with Rand as its Currency
 Determine the Functional and
Presentation currency for Shoprite
Zambia and African Super Market
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Determining Functional currencies
 The currency that mainly influences
 1.sales prices for goods and services. .
 2. labour, material and other costs of
providing goods and services.
 3.in which funding from issuing debt
and equity is generated.
 4.in which receipts from operating
activities are usually retained
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Presentation currency
 IAS 21 defines the presentation currency
as the currency in which the entity
presents its financial statements.
 If the entity in question is a foreign-
owned subsidiary. It may present its
financial statements in both functional
currency and its parent presentation
currency
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Accounting for
individual transactions
designated in a foreign currency
 Where an entity enters into a
transaction denominated in a
foreign currency , that transaction
must be translated into the
functional currency before it is
recorded.
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Examples of foreign Recording foreign Currency

currency transaction
 Imports of raw materials
 Exports of finished goods
 Importation of foreign-
manufactured non-current assets
 Investments in foreign securities
 Raising an overseas loan
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transactions
 The exchange rate used to initially
record transactions should be
either:
 The spot exchange rate on the date
the transaction occurred, or
 An average rate over a period of
time provided the exchange rate has
not fluctuated significantly.
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Recording foreign
Spot exchange rate Currency transactions
 An exchange rate is the value of a 3 types of transaction are
given currency expressed as a expected
proportion of another currency.
1. Cash Transactions
2. Credit Transactions
 A spot exchange rate is a price at
which the currency is bought or 3. Settlement of credit
sold according to the current price transactions
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Recording foreign
Currency transactions Exchange gain or loss
When recording , If the exchange rate of
1. Cash transactions are translated at the
spot rate on the date of the transaction
recording a credit transaction
2. Credit Transactions are translated at differs with that of recording a
the spot rate on the date of the cash settlement of that
transaction transaction, there will be an
3. Settlement of credit transactions are
translated at the spot rate on the date exchange gain or loss .
of the payment
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Exchange gain or loss Exchange gain or loss

Exchange gain or loss is Increase
or decrease in cash flow caused
by a change in the exchange rate
of two currencies.
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 IAS 21 requires that exchange gains or
losses on settlement of individual
transactions be recognized in the
income statement in the period in which
they arise.
 However, IAS 21 is not definitive in
stating where in income statement any
such gains or losses are classified.
 They may be put under operating
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Exchange gain or loss Example

 IAS 21 requires that exchange gains or
losses on settlement of individual
transactions be recognized in the
income statement in the period in which
they arise.
 However, IAS 21 is not definitive in
stating where in income statement any
such gains or losses are classified.
 They may be put under operating
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 On 7 May 20×6 a dollar-based entity sells
goods to a German entity for €12,000 on
credit when the rate of exchange was $
1=€ 3.2. On 20 July 20×6 the customer
remitted a draft for €12,000 when the
rate of exchange was $1 = € 3.17
 Show how this transaction will be
recorded in the books of the selling
company
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Solution Solution
 To record the sale you have to translate the
 Settlement $1=€3.17
amount from € to $.When translating you need  X=€12, 000, therefore X=12,000/3.17
to use proportion and ratio.  X=3,785
 Dr Bank € 48,000 @3.17 3,785
 $1=€3.2  Cr customer
3,750
 X=€12, 000, therefore X=12,000/3.2
 Cr Profit or loss (exchange gain) 35
 X=3,750  The company was to receive $3,750 but because of
 The double entry will be exch rate changes it received 3,785 recording a
gain of 35
 Dr Receivable €12,000 @ 3.2 3,750  The $ 35 exchange gain forms part of the profit for
 Cr Sales 3,750 the year

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GROUP ACCOUNTING – FOREIGN CURRENCY
Treatment of year-end balances
The treatment of any ‘foreign’
items remaining in the
statement of financial
position at the year-end will
depend on whether they are
classified as monetary or
non-monetary:
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Treatment of year-end balances
 Non –Monetary items these includes non –
current assets, inventory and investments.
 These are not retranslated.
 They are maintained at the same rate at which
they were first recorded in the financial
statements
 Items carried at cost less depreciation should be
translated at the exchange rate at the date of
acquisition.
 Items carried at fair value less depreciation
should be translated and recorded at the
exchange rate at the date of revaluation
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Solution
 21 October 20x7 Translate transaction prior to
recording 486,000/ 11.15=$43,587
 Dr. Purchases $43,587
 Cr Payables $243,587
 4thDecember 20x7 Swk486,000 is paid at 4th
December rate this is486,000/10.93=$44,465
 Dr. Payables $43,587 ( payable created 21 oct)
 Dr. Income $877i.e exchange loss
 Cr Cash $44,465
 $877 is an exchange loss arising because the functional
currency $ has weakened against the transaction
currency (SwK) since the transaction occurred.
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Treatment of year-end balances
 Monetary items include assets and
liabilities to be received or paid in a
fixed or determinable number of
units of currency e.g. Cash,
receivables, payables and loans
.These are retranslated using the
closing rate (year end exchange
rate)
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Example
 An entity, GLL, has a reporting date of 31
December. On 21October 20 ×7GLLplc buys goods
from a Swedish Supplier for SwK486, 000.
 On 4thDecember 20 ×7 GLLplc pays the Swedish
supplier in full.
 Exchange rates were as follows:
 21October 20 ×7 $1 = SwK 11.15
 4thDecember 20 ×7 $1= SwK 10.93
 Required:
 Show how the expense and liability, together with
the exchange difference arising, should be
accounted for in the financial statements.
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Example
 An entity, PWC, which has reporting date of 31
December and the dollar ($) as its functional currency,
borrows in the foreign currency of the Kram (K). The
loan of K180, 000 was taken out on 1 January 20×7. A
repayment of K60, 000 was made on 1 March 20×7.
 The following rates of exchange are relevant:
K1 to $
 I January 20×7 K1:$2
 1 March 20×7 K1:$3
 31 December 20×7 1:$3.5
 Required:
 Show how liability and the exchange difference will be
represented in the yearend financial statements.
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Solution Example try

 ZRate $
 1 January 20X7 record liability 180,000 2.0 360,000
 1 Mar 20X7 repay part of liability(60,000) 3.0 (180,000)
 Exch loss – bling figure to income 240,000
 31December 20X7 120,000 3.5 420,000
 The $240,000 is the loss that will be reported in
income for the year. The liability is a monetary item
and so has been retranslated at the closing rate. It will
be reported in the statement of financial position as
$420,000.
 An entity, BBC, which has reporting date of 31 December
and has the dollar ($) as its functional currency, purchased
a plot of land overseas on 1 March 20×0. The entity paid for
the land in the currency of the Rylands (R). The purchase
cost of the land at 1 March 20×0 was R90, 000. The value of
land at the reporting date was R120, 000.
 Rates of exchange were as follows:
 1 March 20×0 R8:$1
 31 December 20×0 R10:$1
 Required:
 Show how this transaction should be accounted for in the
financial statements for the year ended 31 December 20×0
 If the land is carried at cost
 If the land is carried at valuation

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Solution Solution
 As the asset is a non-monetary item, it will not
normally be subject to retranslation at the reporting
date. If the land is carried at cost, the asset remains
stated at $ cost translated at the rate ruling at the date
of purchase as follows.
 R90, 000 dividend by 8 = $11,250
 If the revaluation model from IAS 16 property, plant
and equipment or IAS 40 Investment property is
applied, the asset must first be remeasured at the
reporting date to fair value in Rylands. The revalued
amount is then translated at the rate at the reporting
date to provide the $ valuation for inclusion in the
financial statements
 If IAS 16 is applied, the movement in carrying value of
$750 is reported in other comprehensive income and
taken to other components of equity in the statement
of financial position. If IAS 40 is applied, the
movement in carrying value of $750 is taken to profit
or loss for the year.
 R Rate $
 1 March 20x0 purchased land 90,000 8.0 11,250
 Gain to profit or loss 750
 31 December 20X0 120,000 10.0 12,000

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Consolidation of a Consolidation of a
foreign operation foreign operation
In principle, the same  You should prepare
1. a group structure,
workings and accounting 2. Net assets,
adjustments that are 3. Goodwill,
required in any consolidation 4. non-controlling interest
question are used when 5. retained earnings.
consolidating a foreign  However, there are three particular issues
that must be dealt with when consolidating
subsidiary. a foreign subsidiary as follows:
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Consolidation of a
foreign operation
1. Translation of the subsidiary’s income
and expenses in the income statement
and other comprehensive income into the
presentation currency of the parent.
2. Translation of the subsidiary’s assets and
liabilities in the statement of financial
position into the presentation currency of
the parent.
3. Translation of goodwill on acquisition of
the foreign subsidiary into the
presentation currency of the parent.
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Consolidation of a
foreign operation
 The third issue arises as IAS 21 requires that
goodwill is calculated using the functional
currency of the subsidiary and then subject
to annual retranslation at the closing rate
at each reporting date.
 Therefore working for net assets and
goodwill should initially be prepared in the
functional currency of the subsidiary,
before translation into the presentation
currency of the parent at an appropriate
37
point.
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Consolidation of a Translation of the financial

foreign operation statements of a foreign subsidiary
 Workings for non-controlling interests, The following exchange rates
group retained earnings and other
should be used in the
components of equity will also include
elements relating to the foreign translation for foreign
subsidiary which will need to be subsidiary before consolidation
translated into the parent entity’s
presentation currency as part of the
consolidation exercise

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Translation of the financial Exchange differences arising on

statements of a foreign subsidiary
 The Income & expenses and other
comprehensive income translate at
the rate for each transaction or, an
approximation of the average rate for
the year
 Assets and liabilities translate at
the closing rate (i.e rate at the
reporting date)
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consolidation of foreign subsidiary
There are 3 components of
total exchange difference
these are;
 From opening net assets
From Retained net assets,.
From Goodwill
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Consolidated Workings Net assets Example

Parent is an entity that owns 80% of the equity shares of Overseas, a foreign entity that has the shilling as
 Find the Net asset of the subsidiary its functional currency. The subsidiary was acquired at the start of the current accounting period on 1
January 20 X7 when its reported reserves were 12,000 Shillings.
Statement of Financial Position Parent Overseas
at acquisition and reporting date in $ Shillings

functional currency in the normal Investment (41,998 shillings) 7,636

Assets 19,000 80,000
way ______
26,636
_______
80,000
______ _______
Equity and liabilities $ Shillings
Equity capital 10,000 20,000
Retained earnings 12,000 16,400
Liabilities 4,636 43,600
_____ ______
26,636 80,000
______ ______

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Example Example
Statement of profit or loss for the year: At that date the fair value of the net assets of the subsidiary was 40,000 Shillings. This included a fair value
adjustment in respect of land of 8,000 Shillings that the subsidiary has not incorporated into its accounting

Parent Overseas records and still owns.

Parents wishes the presentation currency of the group accounts to be $. Goodwill, which is unimpaired at
$ Shillings the reporting date, is to be accounted for using the full goodwill method (fair value method). At the date of
acquisition, the non-controlling interest in Overseas had a fair value of 10,000 Shillings.
Revenue 16,000 10,400 Neither entity recognized any other comprehensive income in their individual accounts in the period.
Relevant exchange rates (Shillings to $) are:
Costs (5,000) (5,200) Date Exchange rate (shillings to $1)
______ _______ 1 January 20X7
31 December 20X7
5.5
5.0
Profit before tax 11,000 5,200 Weighted average for year 5.2

Tax (4,000) (800) Required:

_______ _______ Prepared the consolidated statement of financial position at 31 December 20X7, together with a
consolidated statement of profit or loss and other comprehensive income for the year ended 31
Profit for the year 7,000 4,400 December 20X7.

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Journal Entry Solution

 Dr asset 8000 Workings
 Cr S Reserves 8000 (W1) Group structure
P

80%

O NCI = 20% for complete year

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Step 1 calculate the net assets at

acquisition and reporting date in
functional currency
Consolidated Workings Net assets
 Translate in presentation currency follow the
 Shillings following steps
 Acq’n Rep  Total of Net asset at acquisition, Translate
using the opening rate
 Share capital  Post acquisition profit ,Translate using the
 20,000 20,000
 Retained earnings average rate
 12,000 16,400
 FV adjustment – land  Total Net assets at reporting date Translate
 8,000 8,000 using the closing rate
 40,000 44,400  Exchange gain /loss is balancing figure and is
 Post-acquisition profit shared between NCI and parent according to
% share holding
 44,400-40,000=4,400
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Exmp 2Gain or loss retranslation Step 3.Share exchange gain loss

of net asset Shillings to $ between group and the NCI
Rate  Sh$  Note that the total gain (loss) on
 Net assets at acquisition retranslation of net assets must be
( opening rate )  40,0005.5 7,272 allocated between the group and NCI based
upon their respective shareholding as
 post acquisition profit  4,400 5.2 846 follows:
(aver age rate) 
 Exchange gain (loss)bal  Group (80% x 762 = 610
762  NCI (20% x 762 = 152)
 net assets reporting dat  The gain 610 will taken to the group
(Clossing rate ) statement of financial position
 44,400 5.0 8,880  while the 152 will be added go to NCI.


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4.goodwill in subsidiary
Consolidated Workings good will
 Calculate good will in functional currency
 : functional currency  Shillings


Cost of investment
in the usual way. $7,636 @ 5.5  41,998
 Translate opening good will using the  FV of NCI at  10,000
opening rate acquisition  51,998
 Less impairment which is translated at the FV Net Asset at ac q W2) (40,000)
average rate 11,998
goodwill at acquisition
 Closing good will translate at closing rate 0
 Impairment
 Exchange gain/loss is balancing figure  Closing GW
11,998

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Exchange gain /loss Retranslation

GW Consolidated Workings good will
 Shil Rate $  Exchange gain/loss is shared
 Goodwill at acquisition  11,998 5.5 2,182
(Opening rate) according to the method being used

Impairment (avg rate) 0  If its fair value -share between NCI
 Exch gain /(loss)bal fig  218
and parent according to share %
  If its net asset allocate all to parent
 Closing GW ( closing
rate)  11,998 5 2,400

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GW share of Ex gain
 Note that the goodwill on acquisition is
supposed to be 2,182 but it has increased to
Consolidated Workings NCI
2,400 because of the fall in exchange rate  Calculate the NCI in the normal way
there by having a gain of 218  Translate cost on NCI at acquisition
 The gain is allocated between group and using the opening rate
NCI based upon respective shareholding:  Translate share of post acquisition
 Group 80% X 218 = $174 profit using the average rate
 NCI 20%X 218 =44  Impairment use the average rate
 The gain 174 will betaken to the group
 Share of ex gain is added
statement of financial position while the
44 will be added go to NCI  Share of ex los is subtracted
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Example Non-controlling Consolidated Workings group

internet retained earnings
 W

 Shil Rate $  Use the average rate

 NCI fair value at
acquisition 10,000 5.5 1,818  Share of Exchange gain is added
 NCI share of post- 880 5.2 170
acquisition profit while
 (20% x 4,400 w2)

 NCI share of exchange 44  Share of Exchange loss is subtracted
gain retranslation of 152
GW w3
 NCI share of exchanging 
gain on retranslation of 2,184
Net assets (W6)

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6.Group share of total exchange

group retained earnings differences
 $  $

 Parent 12,000  Group share of
 Group share of post- retranslation
  174
acquisition profit of gain on goodwill
(80% x 4,400 (W2) (W3)
 Translated at Group share of  610
average rate @  676 retranslation are net
assets (W6)  784
5.2(3520/5.2)
To Statement of
  1 2,676 Financial Position

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Translation of the financial

GSFP
statements of a foreign subsidiary 
$

 Goodwill (W3)
 The Income & expenses and other  2,400
 Assets (19+((80+ 8,) / 5.0)
comprehensive income translate at  36,600
the rate for each transaction or, an  39,000
approximation of the average rate for  Equity capital
 10,000
the year  Retained earnings w5)
 12,676
Group foreex reserve(w7)
 Assets and liabilities translate at  784
 NCI W4)
the closing rate (i.e rate at the  2,184
Liabilities(4,636+(43,600/5
reporting date)  13,356
 39,000
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IS go thru Remeasurement method

 When an entity maintains its books and records
 Revenue (16,000 + (10,400 / 5.2) 18,000
in a currency other than its functional currency,
 Costs (5,000 + (5,2000 / 5.2) (6,000)
the entity prepares its financial statements by
 Profit before tax 12,000
 Tax (4,000 + (800 / 5.2) (4,154)
translating all amounts into its functional
 Profit for the year 7,846 currency based on the remeasurement method
 Total exchange gains on net investment of foreign subsidiary in (IAS 21 paragraph 34).
the year(218(W3) + 762 (W2) 980  The term “remeasurement” is used in Statement of
 Total comprehensive income for the year 8,826 Financial Accounting Standard (SFAS) 52 issued by
 Profit for the year attributable to:wners of parent (β) 7,676
the Financial Accounting Standards Board (FASB),
 Non-controlling interest (20% x (4,400 / 5.2) 170 7,846
but IAS 21 does not use this term. The term
 Total comprehensive income attributable toOwners of Parent (β)
8,460 “remeasurement” is just used to describe this
 Non-controlling interest 170 (per PorL) + 44 (W3) +152 (W6) translation method.
366

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GROUP ACCOUNTING – FOREIGN CURRENCY
Remeasurement method
 The preparation of financial statements in a currency
different from functional currency could be due to
legal requirements (e.g. listing requirements), tax
reasons, or legacy issues (e.g. systems not changed).
The following cases fall under this situation:
 1. A stand-alone entity that records its books in a
currency other than its functional currency but
presents its financial statements in its functional
currency;
 2. A foreign operation that records its books in its
local currency (for example, because of tax or local
reporting requirements) but its functional currency is
the parent’s currency
 This should be translated using the following
remeasurent method
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Example
 ILLUSTRATION 8.2
 APPENDIX 8A example
 APPENDIX 8B example
 In TAN, P.H.N. and KUAH, E.W., 2019. Advanced
financial accounting: An IFRS Standards
approach.=Chapter 8
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Disposal of a foreign entity
 On disposal , the cumulative exchange
difference recognised as other
comprehensive income and
accumulated in a separate component of
equity becomes realised.
 The standard requires the exchange
reserve to be recycled (i.e reclassified)
on the disposal of the subsidiary as part
of the gain/loss on disposal.
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Remeasurement method
 1. Share capital: Historical rate
 2. Post-acquisition retained earnings: Not translated using single
exchange rate
 3. Monetary assets and liabilities: Closing-rate
 4. Non-monetary assets and liabilities: Historical rate
 5. Non-monetary items at fair value: Rate at the date of the
revaluation
 6. Translation gains or losses: Taken to income statement (except
for non-monetary items at fair value)
 7. Sales, purchases, expenses etc.: Actual / average rate
 8. Cost of sales: Historical rate of original purchase of inventory
 9. Depreciation, amortization and other allocation of
nonmonetary items: Historical rate of original acquisition
 10. Dividends and other appropriation of profits: Actual / average
rate
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Accounting for exchange
gains and losses
 The net balance at each reporting date
represents an unrealized gain or loss for
the group arising on an investment in a
foreign subsidiary which will only be
realized upon disposal of the subsidiary.
 At that point, the foreign exchange reserve
will be recycled or reclassified to profit or
loss and will form part of the reported
profit or loss on disposal of a subsidiary.

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Equity accounting
 The principles to be used in translating a
subsidiary’s financial statements also apply
to the translation of an associate’s.
 Once the results are translated, the
carrying amount of the associate cost (at
the closing rate) plus the share of post-
acquisition retained earnings) can be
calculated together with the group’s share
of the profits for the period and included
in the group financial statements.
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Short Comings in IAS 21
 IAS 21 is either silent or fails to give
adequate guidance on the following issues.
1.Under IAS 21 transactions should be
recorded at the rate ruling at the date the
transactions occurs, but in some cases this
date is difficult to establish.
 For example, it could be the order date, the
date of invoice or the date on which the
goods were received.
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Short Comings in IAS 21
3.IAS 21 provides only limited guidance
where there are two or more exchange
rates for a particular currency or where
an exchange rate is suspended.
It has been suggested that companies
should use whichever rate seems
appropriate given the nature of the
transaction and have regard to prudence
if necessary
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Short Comings in IAS 21
5.Retranslating the opening reserves at the
closing rate gives a difference that goes direct to
reserves under the closing rate method. The
reasoning behind this is that these exchange
differences do not result from the operations of
the group. To include them in profit or loss
would be to distort the results of the group’s
trading operations.
However, some commentators consider that all
such gains and losses are part of a group’s profit
and should be recorded in profit or loss.
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Short Comings in IAS 21
2.IAS 21 states that average rates can be
used if these do not fluctuate
significantly, but what period should be
used to calculate average rates? Should
the average rate be adjusted to take
account of material transactions?
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Short Comings in IAS 21
4.IAS 21 makes a distinction between the
translation of monetary and non-
monetary items, but in practice some
items (such as progress payments paid
against non-current assessments or
inventories, and debt securities held as
investments) may have characteristics of
both
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Practice Questions
 module
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conclusions
 Learning Objectives
 Outline the principles for
translating foreign currency
amounts
 Apply these principles and Account
for the consolidation of foreign
operations
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