13. Foreign transactions and Foreign subsidiaries Flashcards
Define Functional currency
Currency of the primary economic environment in which entity operates
What is meant by presentation currency
Currency in which the year end financial statements are presented
What factors determine an entity’s functional currency
- Mainly influences sales price
- Country whose compettive forces and regulations determine sales price
- Currency which influences labour, material and other costs
- Which funds from financing activities are generated
- Recepis from operating activity are retained in
What is meant by foreign currency
A currency other than the funcitonal currency of the entity
Define spot exchange rate
The exchange rate for immediate delivery
What exchange rate should be recognised for initial recognition
- Either apply spot exchange rate at date of trasnactions
or
Average rate for period if it does not fluctuate significantly
What is meant by a monetary item
Units of currency held and assets and liabilities to be recievd or paid in a fixed or determinable number of units of currency
- changes with exchange rate
How do you treat monetary items at end of the year
Restate at closing rate
How do you treat non monetary items at end of the year
- If measured at historical cost: Do not restate
- If measured at Fair value: restate at exchange rate when fair vallue was determined
Why do exchange rate differences arise
- On retranslation at end of the year
- On cash settlement of monetary assets and liabilities
How are exhcange differences usually recognised
In the profit or loss for the period they arise
As they are part of normal course of business
Unless it is Non monetary items measured at Fair value : where remeasurement gains or losses are measured in other comprehensive income
What are the issues that arise if. aparent has a foreign subsidiaries
- Subsidiary might have different functional currency to their parent
- Subsidiary accoutns must be translated to consolidate
What additional factors determine the funcitonal currency of a subsidiary
- Activites are carried out as an extension of parents’
- Transactions wiht parent are a high or low proportion of the acitivyt
- Cash flows of the subsidiary will affect the parents’
- Whether cash flows from activity are sufficient to service expected debt obligations without funds from parent
What is the translation rule for assets and liabilities in the SOFP between foreign subsidiary and parent
Translate at closing rate
What is the translation rule for Share capital, share premium and pre-acquisition reserve in the SOFP between foreign subsidiary and parent
Translate at historic rate when subsidiary was acquired
What is the translation rule for Post acquisition reserve in the SOFP between foreign subsidiary and parent
Find as a balancign figure
What is the translation rule in SPLOCI between foreign subsidiary and parent
All income, expenses and other comp income should be translated at actual rate or average rate as approximation
What are the rules for translating fair value adjustments
Changes at acquisition : translate at historic rate in good will working
Movement in year: Translate at average rate
Year end changes: Translate at closing rate
What is the calculation of exchange differences in the year
Closing net assets at closing rate
Less opening net assets at opening rate
Less comp income including dividends
Goodwill
= Exchange difference
How are exchange differences presented for foreign subsidiaries in consolidated group statements
In other comprehensive income as translation reserve
How is goodwill treated on translation
As an asset of the foreign subsidiary, it is translated at the closing rate every year
How do you calculate Total effect of acquisition on group reserves
Group share of subsidiary’s post aquisition reserves
+
Group share of exchange differences on net assets and profit
