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Summary of lectures and exercises

Advanced International Financial Reporting Standards (Erasmus Universiteit Rotterdam)

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Week 1 - Business combinations

Apply IFRS 3 – business combinations?
→ Is this a business combination or an acquisition of stand-alone assets and liabilities?

Business combination: A transaction or other event in which an acquirer obtains control over one or
more businesses (IFRS 3.A).
- Transaction
o Yes
- Business: An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants (IFRS 3.A).
o Yes
- Control: an investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee (IFRS 10.A)
1. Power over the investee
Power: existing rights that give the current ability to direct the relevant activities
(IFRS 10.A)
 Does the investor obtain existing rights?
 Yes, 100% of the shares of the investee
 Does the investor get the current ability to use the rights?
 Does the investor get the legal ability to exercise the rights to direct
at the time decisions are made?
o Yes
 Does the investor get the practical ability to exercise the rights? Are
rights substantive?
o Yes
 Can the investor use the rights to direct the relevant activities?
 Relevant activities: activities of the investee that significantly affect
the investee’s returns (IFRS 10.A)
 Yes, because the investor acquires 100% of the shares, the investor
can direct the activities performed by the investee.
→ Yes, the investor obtains power over the investee.
2. Exposure to variable returns
 Does the investor get exposed to variable returns from its investment?
 Yes, dividends
3. Ability to use power to affect those returns
 Will the investor become able to use power to affect those returns?
 Yes
→ Yes, the investor will obtain control over the investee.

- Business combination (transaction / control / business)?

o Yes
- Does one of the IFRS 3 exemptions apply:
o Joint arrangement (An arrangement in which two or more parties have joint control
(IFRS 11.A – see Lecture 7))
 No
o Entities or businesses under common control (the same ultimate parent)
 Not clear – let’s assume no

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→ Apply IFRS 3 Business Combinations

Will the investor record the assets acquired and liabilities assumed in its separate financial
statements?
- No, the investor acquired the shares and will record the shares in its separate financial
statements
- However, the investor will record the assets acquired and liabilities assumed (including
goodwill) in the consolidated financial statements
- Hence, in case of a share deal, IFRS 3 is applied in the consolidated financial statements only

Accounting in separate financial statements

- Measurement of the acquired shares:
o If the investment is such that the entity is classified as a subsidiary, an associate or
an interest in a joint arrangement, then the investment is at initial recognition
measured at the fair value of the consideration transferred
- Is Island classified as a subsidiary?
o Subsidiary: an entity that is controlled by another entity (IFRS 10.A)
o Yes
- Treatment of cost of issuing shares
o The transaction costs of an equity transaction are accounted for as a deduction from
equity to the extent they are incremental costs directly attributable to the equity
transaction that otherwise would have been avoided (IAS 32.35)

Exercise 14.1
Purchase consideration = price of a purchase
Use share capital and share capital - premium
When making journal entries of the consideration, specify all the A&L in the entry, do not name it
investment.
When purchase consideration < FV of net A&L acquired → there is a gain on bargain purchase. It is
recorded in the P/L (but also in the journal entry)

Exercise 14.2
Transaction costs of issuing shares are directly deducted from share capital:
Share capital $800
Cash $800

Exercise 14.3.2
Assume the investor could only determine a provisional FV for the plant at acquisition date
(December 1st 2016) of $125.000. On March 1st 2017, Trout received the final assessment of the FV as
at acquisition date, amounting to $131.000. The economic life plant as of acquisition date is 5 yrs.
- How to account for the plant at acquisition date?
o Use the provisional FV of $125.000 (‘normal’ journal entry as if nothing happened)
- How to account for the plant on March 1st 2017?
o Goodwill calculation based on final FV

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o Journal entry to adjust FV

Plant (131.000-125.000) $6.000
Goodwill $6.000
o Journal entry additional depreciation expenses 2016
 depreciation expenses booked in 2016 based on provisional value
1
∗125.000
 12
=2.100
5
 depreciation expenses based on final FV
1
∗131.000
 12
=2.200
5
Retained earnings $100
Accumulated depreciation plant $100
o Journal entry additional depreciation expenses Jan-Feb 2017
2
∗125.000
 booked 12
=4.200
5
2
∗131.000
should have been 12
=4.400
5
adjustment 200
Depreciation expenses $200
Accumulated depreciation plant $200

Discussion questions
14.2 Importance of identifying the acquisition date

Acquisition date is the date on which the acquirer obtains control of the acquiree.

Important because on this date:

- the fair values of the identifiable assets acquired and liabilities assumed are measured.
- the fair value of the consideration transferred is measured
- the goodwill or gain on bargain purchase is calculated.

14.3 What is meant by ‘contingent consideration’ and how is it accounted for?

Contingent consideration: Usually, an obligation of the acquirer to transfer additional assets or equity
interests to the former owners of an acquiree as part of the exchange for control of the acquiree if
specified future events occur or conditions are met. However, contingent consideration also may give
the acquirer the right to the return of previously transferred consideration if specified conditions are
met.

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14.4 Explain the key components of ‘core’ goodwill.

Core goodwill has two main components:

- Going concern goodwill: relates to the net assets of the acquiree, in that the acquiree’s net
assets together are worth more than the net assets separately, caused by the synergy
created by the acquiree’s net assets within the acquiree as a going concern.
- Combination goodwill: relates to the extra benefits accruing because of the synergy created
by the acquirer and the acquiree combining together eg if the raw materials available to the
acquiree are of particular use to the acquirer. These benefits could affect the recorded
earnings of the acquirer or the acquiree [or both] depending on the nature of the benefits.

Week 2 - Consolidation: basics

Exercise 20.3

Here: yes, Pluto controls Sun → consolidate

Pluto cannot use the rights to direct the relevant

activities (activities of Sun that significantly affect
Suns returns), because investors will not provide
Pluto the ability to direct the activities in Pluto’s
own interest.

Here: Pluto does not have power and hence no control → not consolidate

Does Pluto have existing rights?

- 35% direct voting rights ordinary
shares
- 17% indirect voting rights
ordinary shares (because Pluto
can ‘dictate’ how sun should
vote)

Pluto can use the rights to direct the

relevant activities, because Pluto holds
(directly and indirectly) more than 50%
of the voting rights

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Here: Pluto has power and control over Saturn → consolidate

Exercise 21.4
Sometimes, the consolidated tax payments are more (less) than the consolidated tax expense →
resulting in a deferred tax liability (asset). The following journal entry at end of each year can only be
made of a deferred tax liability/asset is booked at time of acquisition.
Deferred tax liability (balance sheet)
Deferred tax adjustment (income statement)
Purchase consideration
FV of previous held equity interests +
Total FV investment
FV net A&L acquired without tax impact - (just the FV of assets-liabilities acquired)
Excess purchase price
Tax impact FV-adjustments + (FV-adjustments * ) )
Goodwill

The FV net A&L with tax impact = FV net A&L without tax impact + tax impact FV-adjustments

The tax of FV-adjustments is the DTL or DTA to be created

The DTL or DTA is only determined with the FV-changes, hence it is the tax impact of FV-adj

The FV net A&L acquired without tax impact is the same amount as total equity of the investee

Business combination valuation reserve (BCVR)

- formula: (1 - ) * FV-adjustments + goodwill
- it is the same as the excess purchase price
- together with the elimination of the equity of the investee it cancels out the investment
o “pre-acquisition entries”
o Investment = purchase consideration
- debit side
- it stays the same throughout the years (it needs to cancel out the investment and has no
reason to change)

On the balance sheet: fixed assets are at cost (then there is a separate ‘depreciation’ so that the
carrying amount is shown)

On the consolidation sheet

- there is a tax payable, which considers of the actual amount the entities (separately) have to
pay due to taxes
- there is a tax expense (at P/L) which considers of the amount the consolidated group
theoretically should to pay due to taxes
- after calculating the consolidated BS and P/L (IS), the net income FROM THE GROUP is
debited and retained earnings are credited

Exercise 21.2
When stated:
Carrying amount Fair Value
Plant (cost $280.000) $200.000 $210.000
The plant has a further 5-year life

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$ 200.000
It means that the depreciation expense in the next year for the investee is =$ 40.000 and
5
$ 210.000
for the investor =$ 42.000. This results in a depreciation expense-adjustment of $42.000
5
($ 210.000−$ 200.000) $ 10.000
- $40.000 = $2.000, or = =$ 2.000. The BCV-entries regarding
5 5
the plant are:
- Accumulated depreciation ($280.000-$200.000) $80.000
Plant ($280.000-$210.000) $70.000
DTL (($210.000-$200.000) * 30%) $3.000
BCVR (($210.000-$200.000) * 70%) $7.000
- Depreciation expense $2.000
Accumulated depreciation $2.000
- DTL ($2.000 * 30%) $600
Income tax expense $600

Exercise 20.2
Call options provide the holder the right (but not the obligation) to purchase an underlying assets (in
this case: ordinary shares in Cook Islands Ltd) at a specified price, for a certain period of time.

As Palau Ltd holds options in Cook Islands Ltd, it has the potential to control that entity. However,
including the options when determining control depends on whether the options are substantive i.e.
whether it is in the interest of Palau Ltd to exercise the options. The options are currently out of the
money. However, there can be other reasons why Palau may be able to increase its returns from
Cook Islands Ltd, such as access to facilities/scare resources. Then even if the options are out of the
money, Palau Ltd may still consider that it is worthwhile to exercise the options. In such cases, the
options would be included in the decision on who controls Cook Islands Ltd.

Exercise 20.4
When discussing the potential for the investor (Pumpkin Ltd) to be classified as a subsidiary of the
investee (Soup Ltd), discuss:
- the concept of control
- the need for judgement
- factors to consider when determining the existence of control

It will probably be concluded that Pumpkin Ltd is the parent of Soup Ltd. However, if it is expected
that the attendance at the AGM will considerably increase if Pumpkin will act in its own interest
instead of the interest of all shareholders and therefore Pumpkin will not have the majority of the
voting rights at the AGM in such a situation, then Pumpkin is not the parent.

Exercise 20.5
- DETERMINING SUBSIDIARY STATUS; CAN BE IMPORTANT! -

Discussion questions
20.1 What is a subsidiary?

A subsidiary is an entity that is controlled by another entity, a parent.

20.2 What is meant by the term “control”?

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An investor controls an investee when the investor is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power over
the investee.

20.3 When are potential voting rights considered when deciding if one entity controls another?

Potential voting rights are rights to obtain voting rights of an investee, such as within an option or
convertible instrument.

Potential voting rights are only considered if the rights are substantive i.e. practical or utilitarian.
This depends on the terms and conditions associated with the options. If an investor holds options
that are deeply out of the money – such that the investee would never exercise those options – the
options would not be considered to be substantive.

20.4 Are only those entities in which another entity owns more than 50% of the issued shares
classified as subsidiaries?

No. The criterion for consolidation is not based on percentage ownership, but rather it is based on
the concept of control. However, when the percentage interest is below 50%, judgement on the
existence of control is required. In forming this judgement, the accountant has to rely on evidence to
form an opinion.

20.5 What benefits could be sought by an entity that obtains control over another entity?

Consider:
- Dividends
- Returns from structuring activities with the investee e.g. obtaining a supply of raw material,
access to a port facility
- Returns from denying or regulating access to a subsidiary’s assets e.g. a patent for a
competing product
- Returns from economies of scale
- Remuneration from provision of services such as servicing of assets, and management

Week 3 - Consolidation: intragroup transactions

Previously held equity interest
- when a previously held equity interest is recorded at FV through OCI, a change in FV is
booked through Other Comprehensive Income instead of P/L and recorded as financial asset
reserve. Journal entry:
Investment
Financial asset reserve
- journal entries when the remaining part of the shares is acquired:
o recognize previously held equity interest at FV and gain/loss in P/L
Financial asset reserve
Financial income (→ added to retained earnings)
o purchase additional shares
Investment
Cash

Exercise 21.6

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The sold inventory has an impact on retained earnings 30 June 2014 due to a P/L impact in year 1 (1
July 2013- 30 June 2014):
- COGS needed an adjustment of $25.000-$20.000= $5.000 (increase)
- hence taxes needed an adjustment of 30%*$5.000= $1.500 (decrease → higher costs, lower
taxes)
- → profit needed to be $3.500 lower → retained earnings were $3.500 lower (so retained
earnings was debited)
- no impact in the second year: all inventory was sold
- Retained earnings $3.500
BCVR $3.500

Accumulated depreciation:
$ 60.000
- Dorado: =$ 12.000 per year ($24.000 total in 2 years)
5
$ 70.000
- Consolidated: =$ 14.000 per year ($28.000 total in 2 years)
5
- Accumulated depreciation = $85.000 + $28.000 = $113.000
- Adjustment of $113.000 - $85.000 - $44.000 = $16.000
o causing a decrease in the DTL effect of ($16.000-$10.000)*30%=$1.800
- year 1 (1 July 2013 - 30 June 2014):
o depreciation expense was $14.000-$12.000=$2.000 higher
 taxes were $2.000*30%=$600 lower (higher costs → lower taxes)
 profit (and thus) retained earnings were $2.000-$600=$1.400 lower
- year 2 (1 July 2014 - 30 June 2015):
o depreciation expense is $14.000-$12.000=$2.000 higher
o taxes are $2.000*30%=$600 lower (higher costs → lower taxes)
- Plant $10.000
Accumulated depreciation - plant $16.000
Deferred tax liability $1.800
Depreciation expense $2.000
Income tax expense $600
Retained earnings $1.400
BCVR $7.000

Exercise 22.2
REMINDER: when working with expenses/revenues, do not forget the tax impact and tax payable!!!
Make financial statements of the previous years and add the net income to retained earnings

Pay attention to the table at 22.2d, and determine all things that happen.

Week 4 - Consolidation: non-controlling interest

With a non-controlling interest the parent consolidates 100% of the assets and liabilities, but adds
“NCI” to the equity part of the balance sheet to represent the net assets that do not belong to the
shareholders of the parent.

Exercise 22.2
There cannot be a ‘debit’ tax payable → it should be a deferred tax asset
When an inventory item of the parent is sold to the subsidiary (and becomes a non-current asset),
the item on the consolidated balance is a non-current asset too and is also depreciable.

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ALWAYS: if tax expense is a credit adjustment, then the debit adjustment is deferred tax asset
The consolidated deferred tax asset is the separate DTAs plus the adjustment DTA. However, if there
is a DTL and DTA<DTL, the amount that ‘should have been’ allocated to the DTA is subtracted from
the DTL.

When paying dividends:

Dividends paid
Dividend revenue

Adjustments for consolidation:

Dividend revenue
Dividends paid

Exercise 23.3
When only a few FV adjustments are given, you need make sure FV-assets and -liabilities are the
same amount as the equity amount of the investee:
- equity investee - FV asset 1 - FV asset 2 = either an asset or a liability
- equity investee = FV net A&L without tax impact

When all assets and liabilities are given, then the FV net A&L without tax does not need to be the
same as the equity amount of the investee.

Goodwill calculation under NCI:

- Land XXXX
Machinery XXXX +
FV net A&L acquired without tax impact XXXX
Land XXXX
Machinery XXXX +
Total FV change XXXX
Tax (DTL) - XXXX -
FV net A&L acquired with tax impact XXXX

- Purchase consideration XXXX

FV previously held equity interest XXXX
Value NCI (NCI% * FV net A&L with tax) *** + XXXX +
Total FV investment XXXX
FV net A&L acquired with tax impact - XXXX -
Goodwill XXXX

*** Under the partial goodwill method!

- partial goodwill method: NCI% * FV net A&L with tax
- full goodwill method: NCI% * FV NCI

The investment will be on the balance sheet of the parent for the amount that is paid for (so not the
total FV investment including the NCI).

The equity of the investee will be cancelled out by taking the percentage of interest * equity. The
remaining part will be added to the NCI ‘balance sheet’. The same applies for the BCVR. The NCI
‘balance sheet’ contains a NCI part too, which is then added to the consolidated balance sheet.

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With the allocation of the profit (for consolidation purposes), the NCI part of the profit is added to
NCI and the ‘remainder’ (the percentage of interest in the investee) is added to retained earnings.

With NCI → tax (DTL) is subtracted, but without NCI → tax (DTL) is added

Week 5 - Financial instruments and hedging

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When the bond pays interest at 6% per annum, in arrears, it means that the yearly interest is paid at
the last day of the year. When issued at July 1 st, the first interest payment is at June 30 th.

Effective interest rate = the rate that exactly discounts the estimated future cash payments or
receipts through the expected life of the financial instrument (or, when appropriate a shorter period)
to the net carrying amount of the financial asset or liability.
- net carrying amount
o on initial recognition financial liabilities must be recognized at fair value
o in addition, transaction costs directly attributable to the issue of a financial liability
should be subtracted from the fair value (except in case of measurement at fair value
through profit and loss)
o net carrying amount = fair value - transaction costs
- effective interest rate
o rate that matches the discounted future cash outflows with the net carrying amount
o is used when determining interest expense

For example:
Given: face value of bond: $100, due time: 3 years, nominal (stated) rate: 8%, market rate: 10%
€8 € 8 $ 10 8
Bond price = fair value = NPV (cash flows) = + + = $95.03
1.10 1. 102 1 .103

Interest payment → interest actually paid by an issuer: face value * nominal interest rate
Interest expense → interest actually required by bondholders: book value bond * effective rate
- book value of the bond = net carrying amount + yearly interest surplus

Total expenses = (face value - fair value) + interest payments * #years (or months) + transaction costs

Journal entries when accounting for a bond:

- issuing date:
Cash (net carrying amount)
Bonds payable (net carrying amount)
- interest payments (if paid in arrears):
Interest expense (book value bond * effective rate)
Interest payable (face value bond * nominal rate)
Bonds payable (surplus)
- maturity date (if interest is paid in arrears):
Interest expense (book value bond * effective rate)
Interest payable (face value bond * nominal rate)
Bonds payable (surplus)

Bonds payable (book value bond; should be the face value now)
Cash (face value)

Make this table:

Book value bond (1/1) Interest expense Interest payable Book value bond (31/12)
(book value * effective) (face value * nominal) (begin + surplus)

Cash flow hedge (variable interest rate instead of fixed interest rate)

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Changes in fair value hedge instrument are recognized through OCI in equity
Changes in fair value hedge instrument do not affect P&L
P&L is not affected by changes in variable interest rate

discount factor = 1/(1+r)^t (→ r is always the variable rate))

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With hedge accounting, when the hedging reserve is decreasing in value, the journal entry is
Hedging reserve
Swap

Cash flow hedge (fixed interest rate instead of variable interest rate)

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Hedged item is recorded at fair value

Hedge instrument is recorded at fair value
Changes in fair value of the hedged item are recognized in P&L
Changes in fair value hedge instrument are recognized in P&L
P&L reflects variable interest rate

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Week 6 - Associates and joint arrangements

Investments in associates are those entities in which the investor has significant influence, but no
control or joint control, over the financial and operating policies.
- investments in associates are accounted for using the equity method of accounting
- investments are recognised initially at cost (including transaction costs)
- the consolidated financial statements include the investor’s share of the profit or loss and
other comprehensive income, after adjustments to align the accounting policies with those
of the investor.
- unrealised gains arising from transactions with the equity-accounted associates are
eliminated against the investment to the extent of the investor’s interest in the investee
o gains and losses from upstream and downstream transactions between an entity
(including its consolidated subsidiaries) and its associate are recognised in the
entity’s financial statements only to the extent of unrelated investor’s interest in the
associate.
o Upstream transactions: sales of asset from an associate to the investor
o Downstream transactions: sales of assets from the investor to its associate
o The investor’s share in the associate’s gains or losses resulting from these
transactions is eliminated

Cost of investment (=purchase consideration) XXXX

Total assets XXXX
Total liabilities XXXX -
Net assets XXXX
Investor’s share of net assets (%*net assets) XXXX -
Goodwill XXXX

It matters if the investor does or does not prepare consolidated financial statements
- treatment associates in separate financial statements
o in case of no consolidation
 equity method (IAS 28)
o in case of consolidation
 at cost, fair value (if IAS 39/IFRS 9 is met) or equity method (IAS 27)
- treatment associates in consolidated financial statement
o in both cases: equity method (IAS 28)

Even if in investee is an associate of an investor, consolidation adjustments are still required (if the
investor used the equity method for recording the investment). When determining these
adjustments, determine the separate ‘balance sheets’ for the two different methods (at cost and
according to the equity method). Sum up the differences per post of the balance sheet and make the
adjustments.

Exercise C.2.1 (assuming no consolidation - equity method)

Acquisition
- Journal entry
Investment in associate
Cash
- ‘Associate’ on the balance sheet is the amount the investor paid for the shares.

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- → under IFRS, goodwill is not recorded separately (so it is included in the ‘investment in
associate’)

Dividend payment (from investee)

- Consequences
o investee
 retained earnings decreases by the amount of dividends paid
 cash decreases by the amount of dividends paid
o investor
 total net assets of investee decreases, so the investor’s share of net assets
decreases by the amount of dividends paid * percentage of share
 cash increases by the amount of dividends received
 ‘associate’ decreases by the amount of dividends received
- Journal entry
Cash
Investment in associate
- → dividends are not recorded as net income
- → decline in investment in associate, because net assets investee also declined

Net profit (of investee)

- Consequences
o investee
 retained earnings increases by the amount of net profit
 cash increases by the amount of net profit
o investor
 total net assets of investee increases, so the investor’s share of net assets
increases by the amount of net profit * percentage of share
 retained earnings increases by the amount share in net profit
 ‘associate’ increases by the amount of share of net profit
- Journal entry
Investment in associate
Share of profit or loss of associate
- → share in net profit is recorded as income
- → increase in investment in associate because net assets investee also increased

Asset revaluation (of investee)

- Consequences
o investee
 ‘asset revaluation’ increases by the amount of revaluation
 the particular asset increases by the amount of revaluation
o investor
 total net assets of investee increases, so the investor’s share of net assets
increases by the amount of revaluation * percentage of share
 ‘asset revaluation’ increases by the amount of share in revaluation
 ‘associate’ increases by the amount of share in revaluation
- journal entry
Investment in associate
Asset revaluation surplus
- → increase in asset revaluation surplus
- → increase in investment in associate because net assets investee also increased

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Exercise C.2.2 (assuming consolidation - cost method)

Investment in associate is recorded at cost, so it does not changes when there is a net income or
when dividends are paid

Journal entries
- acquisition
Investment in associate
Cash
- dividend payment
Cash
Dividend revenues
→ dividends are recorded as income
- net profit
no entry
→ net profit (and other changes in equity of the investee) are not recorded if ‘investment in
associates’ is recorded at costs. The value of the investment in associates does not change in
the separate financial statements if recorded at costs (except in case of an impairment).

Journal entries for consolidation adjustments

Dividend revenues
Investment in associate

Investment in associate
Share of profit or loss of associates

Remind that for the next year, the start balance is the same as the ending balance of the previous
year → including the differences in for example ‘investment associate’

Exercise C.4
Dividend
- Journal entry declaration
Dividend receivable
Investment in associate
- Journal entry receipt
Cash
Dividend receivable
- → when there is no declaration, but only a receipt, then the ‘dividend receivable’ part is
eliminated:
Cash
Investment in associate

When inventory remains unsold if a down- or upstream sale has occurred, the investor’s share in the
investee’s ‘unrealized’ gain should be eliminated.
- part of unsold inventory * profit of transaction after tax (investee) * investor’s share =
adjustment share investor in net profit of investee (it will be a reduction). The same amount
will be in the future period an addition if in that future period, that part of inventory is sold
- if in an upstream sales had occurred in the previous period
o then: 100% was unsold → adjustment was a reduction in the previous period (no
adjustment for the current period)
o now: 100% of that transaction is sold in the current period → adjustment is an
addition in the current period

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Share investor in net profit XXXX

upstream sale XXXX
downstream sale XXXX
(previous period) XXXX +
Adjustments for upstream and downstream sales XXXX -
Share in net profit to be recognized by the investor XXXX

Journal entry
Investment in associate
Share of profit or loss of associates

Week 7 - Foreign currency

Local currency: currency of the country in which the foreign operation is based
Functional currency: the currency of the primary economic environment in which the entity operates
Presentation currency: the currency in which the financial statements are presented

Rules for using one or another exchange rate

- local to functional currency
o assets and liabilities
 monetary items (loans, debtors, creditors) → closing exchange rates
 non-monetary items
 historical cost → exchange rate at transaction date
 fair value → exchange rate at date of determining fair value
 depreciation follows the same rates as the item that is depreciated
o income and expenses (=transactions) (of foreign operations, excluding foreign
operations in hyperinflationary economies) → exchange rate at transaction date
o equity (on the balance sheet) → historical rate (exchange rate at transaction date)
o exchange differences are recognized in P/L (actually only for monetary items)
o profit is a ‘residual’ to keep the balance sheet in balance. Use this profit for the P/L
account as the net profit. Then to keep the P/L account in balance, add a ‘residual’
post before ‘profit before tax’ named ‘FX translation gain/loss’.
- functional to presentation currency
o assets and liabilities (of foreign operations, including goodwill and fair value
adjustments arising on acquisition) → closing exchange rates (rate at reporting date)
 depreciation expenses are treated as normal expenses → transaction date
 accumulated depr exp are treated as the asset → closing rate
o income and expenses (=transactions) (of foreign operations, excluding foreign
operations in hyperinflationary economies) → exchange rate at transaction date
o equity (on the balance sheet) → exchange rate at transaction date
o exchange differences are recognized in other comprehensive income and are
presented on the balance sheet within equity in the translation reserve (that is the
‘residual’ on the balance sheet)

GOGS and COGafS are not translated with an exchange rate! They are determined through
inventory/cost of sales calculation.

Exercise 24.2
Use the exchange rate (average of the year) also for the tax expenses!

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From local to functional currency → first translate the balance sheet (profit is the ‘residual’), then the
P/L account, with an extra ‘residual’ post of ‘FX translation gain/loss’

From functional to presentation currency → first translate the P/L account, add the translated profit
to the balance sheet (so do not use any exchange rates there), then add a ‘FX translation reserve’ to
the balance sheet to keep it in balance (it is a ‘residual’).

Joint arrangements

Joint arrangements: an arrangement of which two or more parties have control

- parties are bound by a contractual arrangement
- contractual arrangement fives two or more parties joint control of the arrangement
o joint control: decisions about the relevant activities require unanimous consent of
the parties sharing control (→ is especially the case when the shares are 50%-50%)
o control: an investor controls an investee when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee
- joint operation: parties have right to assets and obligations for liabilities
- joint venture: parties have rights to net assets (but no rights to individual assets and no
obligations for liabilities) → use the equity method of accounting

The investor classifies its interests in joint arrangements as either joint operations or joint ventures
depending on the investor’s right to the assets and obligations for the liabilities of the
arrangements.

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