Foreign Exchange

Foreign exchange
Net Investment in Foreign Operation

• A monetary item in the form of a receivable or payable to a foreign
operation for which settlement is neither planned for nor it is likely to occur
in the foreseeable future.
• IAS 21:32 sets out:
• Such items (and their FX differences) are, in substance, a part of the
entity’s net investment in the foreign operation
• In the foreign operation’s separate FS, the exchange differences are
recognized in P&L
• In the consolidated FS, the exchange differences are recognized initially in
OCI and accumulated in equity.
• Upon disposal (or loss of control) of the net investment, the cumulative
amount are reclassified from equity to P&L.
2
Illustration 1:
Foreign Currency Transaction
• Ace Corporation, whose functional currency is the domestic currency (DC) entered into the following
transaction during 20x2 and 20x3
• 1/11/20x2: Purchased 1,000 shares of Hi-tech Inc (listed company in US) at price of US$80 per share. Ace
classified the investment as trading securities
 DC/US$ as at 1/11/20x2: DC 1.79
 DC/US$ as at 31/12/20x2: DC 1.82
 Price of Hi-tech as at 31/12/20x2: US$100
• 10/12/20x2: Purchased equipment from German company invoiced at €100,000 to be settled on 28/2/20x3.
 DC/EUR€ as at 10/12/20x2: DC 2.82
 DC/EUR€ as at 31/12/20x2: DC 2.85
 DC/EUR€ as at 28/2/20x3: DC 2.95
3
Illustration 1:
Foreign Currency Transaction
1 November 20x2
Investment in
Dr Investment in trading securities 143,200 shares is non-
monetary
Cr Cash 143,200 item carried
at FV
Record purchase of shares at FX rate of DC1.79/US$1
10 December 20x2
Equipment is
Dr Equipment 282,000 translated at
spot rate at
Cr Accounts Payable (Euros) 282,000 date of
purchase
To record the purchase of equipment
Comprises: 31 December 20x2

exchange
gain (2,400) Dr Investment in trading securities 38,800
and other
gain in FV Cr Gain in FV of trading securities 38,800
(36,400)
Gain in FV of Hi-tech’s shares
4
Illustration 1:
Foreign currency transaction
31 December 20x2 Account
payables in
Dr Exchange loss 3,000 euros is
monetary
item and is
Cr Accounts payable (euros) 3,000
re-measured
using the
To record exchange loss on A/P in euros (100k€ x [DC 2.85 – DC 2.82])
closing rate at
reporting
28 February 20x3 date
Dr Exchange loss 10,000

Cr Accounts payable (euros) 10,000
To record exchange loss on A/P in euros (100k€ x [DC 2.95 – DC 2.85])
28 February 20x3
Dr Accounts payable (euros) 295,000
Cr Cash 295,000
To record settlement of A/P in euros at spot rate of DC 2.95/€1
5
Illustration 2: Translation of a foreign subsidiary’s
financial statements
On 31 December 20x0 Durian Pie Ltd, whose functional and presentation currency is the dollar
($), acquired entire share capital of Mango Pie, a foreign company whose financial statements are
prepared in local currency (FC).
MANGO PIE
Statement of financial position at 31.12.20x0
Assets FC
Fixed assets 290,000
Prepaid insurance 18,000
Inventories 60,000
Account receivables 50,000
Cash 14,000
Accounts payable (100,000)
Net assets 332,000
Share capital 300,000

Retained earnings 32,000
Total Equity 332,000
6
Additional information
a. Fixed assets comprised of the following
Net book value (FC) Annual depreciation

Land 50,000 0
Building 100,000 5,000
Equipment 140,000 28,000
290,000 33,000
b. Prepaid insurance expired on 30 June 20x2
c. During 20x2, additional plant and equipment costing FC 100,000 were purchased. The exchange
rate at the date of purchase was FC 1 = $0.73. The plant and equipment were depreciated on a
straight-line basis over 10 years. Assume that a full year’s depreciation was recorded in 20x2.
d. Land was revalued from FC 50,000 to FC 70,000 on 30 September 20x2

7
Mango Pie’s financial statements for the year ended 31 December 20x1 and 20x2 are as follows:
Income statement for years 31 Dec 20x1 31 Dec 20x2

FC FC
Sales 600,000 800,000
COGS (380,000) (430,000)
Gross profit 220,000 370,000
Depreciation (33,000) (43,000)
Insurance (12,000) (6,000)
Operating expenses (78,000) (84,000)
Profit before tax 97,000 237,000
Taxation (20,000) (48,000)
Profit after tax 77,000 189,000
Dividend paid (25,000) (50,000)
Profit retained 52,000 139,000
8
Balance sheet at 31 Dec 20x1 31 Dec 20x2
FC FC
Fixed assets (net) $257,000 $334,000
Inventories 80,000 100,000
Prepaid insurance 6,000 0
Account receivables 70,000 105,000
Cash 89,000 150,000
Accounts payable (98,000) (116,000)
Tax payable (20,000) (30,000)
Net assets $384,000 $543,000
Share capital 300,000 300,000

Retained earnings 84,000 223,000
Revaluation surplus 0 20,000
Total equity $384,000 $543,000
9
Additional information:
1. Sales and expenses were incurred evenly throughout each reporting period
2. Relevant exchange rates are as follows:

1FC =
At 31.12.20x0 $0.81
Average for 20x1 $0.78
At 31 Dec 20x1 $0.76
Average rate when closing inventories (20x1) acquired $0.77
Average rate when closing inventories (20x2) acquired $0.74
Average rate for 20x2 $0.75
Dividends paid (20x1) $0.77
Dividends paid (20x2) $0.72
30.09.20x2 $0.71
At 31.12.20x2 $0.70
10
Required:
(a) Translate the 20x1 financial statements of Mango Pie into dollars assuming that Mango Pie’s
functional currency is the local currency (FC)
(b) Translate the 20x2 financial statements of Mango Pie into dollars assuming that Mango Pie’s
functional currency is the local currency (FC)
(c) Remeasure the 20x1 financial statements of Mango Pie into dollars assuming that Mango Pie’s
functional currency is the dollar.
11
[a] Illustration 2: Translation of a foreign subsidiary’s
Translated Profit & Loss Account for 20x1 (Closing Rate method)

FC Rate $
Sales 600,000 0.78 468,000
COGS (380,000) 0.78 (296,400)
Gross profit 220,000 171,600
Sales and
Depreciation (33,000) 0.78 (25,740) expenses occur
Insurance expense (12,000) 0.78 (9,360) evenly
throughout year
Operating expenses (78,000) 0.78 (60,840)
Taxation (20,000) 0.78 (15,600)
Profit after tax 77,000 60,060 Represent
Dividend paid (25,000) 0.77 (19,250) entirely pre-
acquisition
Retained profit for year 52,000 40,810
earnings
Retained profit b/f (1.1.20x1) 32,000 0.81 25,920 (translated at
Retained profit c/f (31.12.20x1) 84,000 66,730 rate as at
acquisition)
12
Statement of Financial Position at 31.12.20x1
Assets FC Rate $
Fixed assets 257,000 0.76 195,320
Inventories 80,000 0.76 60,800
Prepaid insurance 6,000 0.76 4,560
Accounts receivable 70,000 0.76 53,200
Cash 89,000 0.76 67,640
Liabilities
Accounts payable (98,000) 0.76 (74,480)
Tax payable (20,000) 0.76 (15,200)
Net assets 384,000 291,840
13
Statement of Financial Position at 31.12.20x1 (continued)
FC Rate $
Share capital 300,000 0.81 243,000
Retained earnings 84,000 From P/L 66,730
Foreign Currency Translation
Reserve Bal. fig. (17,890)
Total Equity 384,000 291,840
• Two ways of determining the translation loss of $17,890

 Balancing figure as shown above
 Reconciliation check (or proof of translation gain or loss)
14
• Reconciliation check (or proof of translation gain or loss)
Exposed Items FC Rate $
Net assets b/f 332,000 0.81 268,920

Increase in net assets:
Net profit after tax 77,000 0.78 60,060
Decrease in net assets:
Dividend paid (25,000) 0.77 (19,250)
Net assets c/f 309,730 (A)
384,000 0.76 291,840 (B)
Translation difference for the year (B – A) (17,890)
15
[b] Illustration 2: Translation of a foreign subsidiary’s
Translated Profit & Loss Account for 20x2 (Closing Rate method)

FC Rate $
Sales 800,000 0.75 600,000
COGS (430,000) 0.75 (322,500)
Gross profit 370,000 277,500
Sales and
Depreciation (43,000) 0.75 (32,250) expenses occur
Insurance expense (6,000) 0.75 (4,500) evenly
throughout year
Taxation (48,000) 0.75 (36,000)
Dividend paid (50,000) 0.72 (36,000)
Retained profit b/f (1.1.20x1) 84,000 66,730
Retained profit c/f (31.12.20x1) 223,000 175,480
16
Assets FC Rate $
Fixed assets 334,000 0.70 233,800
Inventories 100,000 0.70 70,000
Accounts receivable 105,000 0.70 73,500
Cash 150,000 0.70 105,000
Liabilities
Accounts payable (116,000) 0.70 (81,200)
Tax payable (30,000) 0.70 (21,000)
Net assets 543,000 380,100
17
Statement of Financial Position at 31.12.20x2 (continued)
FC Rate $
Share capital 300,000 0.81 243,000
Revaluation surplus 20,000 0.71 14,200
Foreign Currency Translation
Reserve (FCTR) (Note 1) (49,580)
Total Equity 543,000 380,100
18
• FCTR check (Note 1)
FC Rate $
Net assets at start of the year 384,000 0.76 291,840

Increase in net assets:
Revaluation surplus 20,000 0.71 14,200
Decrease in net assets:
Dividend paid (50,000) 0.72 (36,000)
Net assets at the end of year 411,790 (A)
543,000 0.7 380,100 (B)
Translation difference for the year (B – A) (31,690)
FCTR, 1 January (17,890)
FCTR, 31 December (49,580)
19
Remeasured Profit & Loss Account (functional currency is $)
FC Rate $
Sales 600,000 0.78 468,000
COGS (380,000) Note 1 (299,000)
Gross profit 220,000 169,000
Depreciation (33,000) 0.81 Note 2 (26,730)
Insurance expense (12,000) 0.81 Note 3 (9,720)
Remeasurement loss Note 4 10
Taxation (20,000) 0.78 (15,600)
Dividend paid (25,000) 0.77 (19,250)
Retained profit b/f 32,000 0.81 25,920
Retained profit c/f 84,000 62,790
20
Note 1 – COGS
FC Rate $
Opening inventories 60,000 0.81 48,600
Purchases 400,000 0.78 312,000
Closing inventories (80,000) 0.77 (61,600)
COGS 380,000 299,000
Note 2 – Depreciation expense

Depreciation expense is translated at the related fixed asset’s historical rate. Similarly,
amortization expense (if any) is also translated at related intangible assets historical rate
Note 3 – Insurance expense

Insurance expense is amortized from prepaid insurance arising as at 31.12.20x0
21
Note 4: Remeasurement loss
Exposed item FC Rate S$
Net monetary liabilities b/f (36,000)1 0.81 (29,160)
∆ in monetary assets/liabilities:
Sale 600,000 0.78 468,000
Purchases (400,000) 0.78 (312,000)
Taxation (20,000) 0.78 (15,600)
Dividend paid (25,000) 0.77 (19,250)
31,150 (A)
Net monetary assets c/f 41,0002 0.76 31,160 (B)
Remeasurement gain (B–A) 10
22
1 Opening exposed monetary items:
FC
Accounts Receivable 50,000
Cash 14,000
Net monetary item (36,000)
2 Closing exposed monetary items:

Accounts receivable 700,000
Cash 89,000
Tax payable (20,000)
Net monetary item c/f 41,000
23
Mango Pie
FC Rate $
Fixed assets (net) 257,000 0.81 208,170
Inventories 80,000 0.77 61,600
Prepaid insurance 6,000 0.81 4,860
Accounts receivables 70,000 0.76 53,200
Cash 89,000 0.76 67,640
Accounts payables (98,000) 0.76 (74,480)
Tax payables (20,000) 0.76 (15,200)
Net assets 384,000 305,790

Share capital 300,000 0.81 243,000
384,000 305,790
24
Illustration 3.1: Goodwill and fair value differentials
Scenario:
• Acquisition of X Co on 31 Dec 20x3 at $2,000,000
• X Co had paid-up capital and retained earnings of RM 3,000,000 and RM 500,000
respectively
• Assets and liabilities of acquiree at date of acquisition were approximated at fair
value except for a building that was undervalued by RM 100,000
• Assume that building is depreciated on a straight line basis over 25 years
• Deferred tax liability of building was RM 20,000
Date Exchange rate

31 Dec 20x3 RM 1 = $0.50
31 Dec 20x4 RM 1 = $0.45
Average rate for 20x4 RM 1 = $0.48
25
• Goodwill (in dollars and RM)
Goodwill calculation
Cost of investment $2,000,000
Fair value of net assets (RM 3,580,000 x 0.5) 1,790,000
Goodwill $210,000
Goodwill in RM ($210,000/0.5) RM 420,000
26
• Consolidation journal entry (in dollars)
31 Dec 20x3
Dr Share capital 1,500,000
Dr Retained earnings 250,000
Dr Building 50,000
Dr Goodwill 210,000
Cr Investment in Y Co 2,000,000
Cr Deferred tax liability 10,000
Acquisition of X Co and recognition of goodwill on 31 Dec 20x3
27
• Translation adjustments on goodwill and FV differentials
Goodwill
Goodwill at 31 Dec 20x3 (RM 420,000 x 0.5) $210,000
Goodwill at 31 Dec 20x4 (RM 420,000 x 0.45) 189,000
Translation adjustment on goodwill (21,000)
FV differential (Building)
Differential at 31 Dec 20x3 (RM 100,000 x 0.5 x 0.8) 40,000
Depreciation less tax (RM 4,000 x 0.48 x 0.8) (1,536)
38,464
Differential at 31 Dec 20x4 (RM 96,000 x 0.45 x 0.8) 34,560
Translation adjustment (3,904)
*Factor in FX translation on goodwill and FV differentials in reconciliation check for FCTR
28
• Journal entry (in dollars)
31 Dec 20x4
Dr Foreign currency translation reserve (Equity) 21,000
Cr Goodwill 21,000
Translation adjustment on goodwill
31 Dec 20x4
Dr Foreign currency translation reserve (Equity) 3,904
Dr Deferred Tax Liability 976
Cr Building 4,880
Translation adjustment on building
29
Scenario
• Co Y is a 90%-owned subsidiary of SingCo and the functional currency is the US
dollar (USD)
• Assume that sales, purchases, operating expenses, interest and tax occur evenly
throughout the year
• Foreign Currency Translation Reserve (cumulative translation losses to 31 Dec 20x4)
is a loss of SGD 20,000
• FV of consideration transferred was USD 300,000 and FV of NCI as at acquisition
date was USD 30,000
• Undervalued inventory as at acquisition date was USD 20,000
• Undervalued inventory was sold on 1 Jul 20x3 (assuming FIFO)
• Tax rate was 20%
Translate financial statements into Singapore dollar (SGD), which is the presentation
currency
30
Co Y
Income Statement
For the Year Ended 31 December 20x5
USD Rate SGD
Sales 1,000,000 1.68 1,680,000
COGS (720,000) 1.68 (1,209,600)
Gross profit 280,000 470,400
Interest expense (8,000) 1.68 (13,440)
Depreciation (40,000) 1.68 (67,200)
Amortization of patents (6,000) 1.68 (10,080)
Tax expense (100,000) 1.68 (168,000)
Dividend declared (20,000) 1.65 (33,000)
Retained earnings, 1 Jan 20x5 200,000 Note 1 344,000
Retained earnings, 31 Dec 20x5 256,000 To SFP 438,680
31
Co Y
Statement of Financial Position
As at 31 December 20x5
USD Rate SGD
Fixed assets, net book value 320,000 1.60 512,000
Patents 60,000 1.60 96,000
Inventory 240,000 1.60 384,000
Accounts Receivable 100,000 1.60 160,000
Cash 10,000 1.60 16,000
Accounts payable 374,000 1.60 598,400
Share capital (Note 3) 100,000 2.10 210,000
Retained earnings
Pre acquisition (Note 3) 120,000 2.10 252,000
Post-acquisition 136,000 186,680
256,000 From I/S 438,680
FCTR Note 2 (79,080)
730,000 1,168,000
32
Exchange rates are as follows:
SGD to USD1
On date of acquisition of Co Y, 1 Jan 20x3 2.1
Purchase of patents by Co Y, 1 Jan 20x2 2.2
Re-sale of undervalued inventory, 1 Jul 20x3 1.95
Purchase of fixed assets by Co Y, 1 Jan 20x4 1.9
Purchase of opening inventory during Dec 20x4 1.8
Purchase of opening inventory during Dec 20x5 1.64
1 Jan 20x5 1.78
Average rate for 20x5 1.68
31 Dec 20x5 1.6
Date of dividend declaration 1.65
33
(1)Determine Retained Earnings at beginning of the year
• Reconstruct Statement of Financial Position as at 31 Dec 20x4
Co Y
As at 31 December 20x4
USD Rate SGD
Net assets 300,000 1.78 534,000
Share capital 100,000 2.10 210,000
Retained earnings 200,000 344,000
FCTR - (20,000)
300,000 534,000
34
(2) Analytical check on translation gain/loss
USD Rate SGD

Net assets at 1 Jan 20x5 300,000 1.78 534,000
Movements in net assets during 20x5
Dividends declared (20,000) 1.65 (33,000)
Balance per movement 356,000 628,680
Net change as at 31 Dec 20x5 translated at CR 356,000 1.6 569,600

Change in FCTR for 20x5 (59,080)
FCTR as at 1 Jan 20x5 (20,000)
FCTR as at 31 Dec 20x5 (79,080)
35
(3) Share capital and pre-acquisition retained earnings at historical rate
USD Rate SGD

At 1 Jan 20x3
Consideration transferred 300,000
FV of NCI 30,000
Less FV of net identifiable assets
Share capital 100,000
Retained earnings 120,000
Add: Undervalued inventory 20,000
Less: DTL on undervalued inventory (4,000)
236,000
36
USD Rate SGD
Goodwill at 1 Jan 20x3 94,000 2.10 197,400
Translation loss - (47,000)
Goodwill at 31 Dec 20x5 94,000 1.60 150,400
Goodwill attributable to SingCo 87,600 1.60 140,160
Goodwill attributable to NCI 6,400 1.60 10,240
94,000 1.60 150,400
37
Undervalued inventory
USD Rate SGD
As at 1 Jan 20x3 20,000 2.10 42,000
Translation loss - (3,000)
Sold on 1 Jul 20x3 20,000 1.95 39,000
Deferred tax liability arising from FV adjustment of inventory

USD Rate SGD
As at 1 Jan 20x3 (4,000) 2.10 (8,400)
Translation loss - 600
Extinguished on 1 Jul 20x3 (4,000) 1.95 (7,800)
38
• Consolidation adjustments in SGD (31 Dec 20x5)
31 Dec 20x5
Dr Share capital 210,000
Dr Inventory 42,000
Dr Goodwill 197,400
Cr Investment in Y Co 630,000
Cr Deferred tax liability 8,400
Cr NCI 63,000
Elimination of investment, recognition of inventory and goodwill
39
Dr Opening RE 35,100
Dr NCI 3,900
Cr Inventory 39,000
Realization of fair value adjustment of undervalued inventory
Dr DTL 7,800
Cr Opening RE 7,020
Cr NCI 780
Tax effects of realization of fair value adjustment of undervalued inventory
40
Dr FCTR (Equity) 49,400
Dr DTL 600
Cr Goodwill 47,000
Cr Inventory 3,000
Translation loss on goodwill and fair value adjustment to inventory

Cr NCI 9,200
Allocation of post-acquisition RE to NCI
41
Dr Income to NCI 12,768
Cr NCI 12,768
Allocation of current profit to NCI
NPAT of Co Y for 20x5 = 127,680
NCI’s share at 10% = 12,768
Dr Dividend income 29,700

Dr NCI 3,300
Cr Dividend declared 33,000
Elimination of dividend declared
Dr NCI 11,348
Cr FCTR (Equity) 11,348
Allocation of FCTR to NCI (see workings on
42
• FCTR
Total NCI’s share

Translation loss on book value of net assets (79,080) (7,908)
Translation loss on goodwill (47,000) (3,200)
Translation loss on fair value adjustment (2,400) (240)
Total (128,480) (11,348)
FCTR attributable to SingCo (117,132)
43
• Analytical check on NCI
NCI’s share
At acquisition date 63,000
Share of cost of sales of undervalued inventory (3,900)
Share of tax expense 780
Share of post-acquisition RE 9,200
Allocation of current income 12,768
Dividend received (3,300)
Share of translation reserve (11,348)
NCI balance at the end of year 67,200
Book value of net assets as at 31 Dec 20x5 569,600
NCI’s share of book value of net assets 56,960
Goodwill attributable to NCI 10,240
NCI as at 31 Dec 20x5 67,200
44
• Consolidation worksheet for 31 Dec 20x5
Consol statement
SingCo Co Y Dr Cr of financial position
Share capital 2,000,000 210,000 210,000 2,000,000
Retained earnings:
As at 1 Jan 20x5 1,500,000 344,000 252,000 1,544,720
35,100 7,020
9,200
Profit retained 120,000 94,680 12,768 33,000 205,212
29,700
As at 31 Dec 20x5 1,620,000 438,680 1,759,932
45
• Consolidation worksheet for 31 Dec 20x5
Consol statement
SingCo Co Y Dr Cr of financial position
FCTR (79,080) 49,400 11,348 (117,132)
NCI 11,348 63,000 67,200
3,300 12,768
3,900 780
9,200
Equity 3,620,000 569,600 3,710,000
Assets 10,000,000 1,168,000 42,000 630,000 10,688,400
197,400 47,000
3,000
39,000
Liabilities (6,380,000) (598,400) 600 8,400 (6,978,400)
7,800
Net assets 3,620,000 569,600 864,516 864,516 3,710,000
46
Illustration 4: Equity accounting of a foreign associated
company
Scenario
• X Co (functional currency is $) acquired a 25% interest in A Ltd (functional currency is
FC) for FC 100,000 ($100,000) on 31 Dec 20x1
• At date of acquisition, A Ltd had net assets of FC 300,000
• FV of net assets on acquisition date is FC 310,000
• Equipment had a remaining useful life of 4 years and zero residual value on
acquisition date
• Tax rate is at 20%
• Assume that there is a goodwill impairment on FC 5,000 in 20x2 (may be deemed to
arise at the end of year and translated at closing rate)
Date Exchange Rate

31 Dec 20x1 FC 1 = $1
Average rate for 20x1 FC 1 = $1.20
Closing rate for 20x2 FC 1 = $1.25
47
company
• A Ltd’s P&L for the year ended 31 Dec 20x2 is as follows:
FC
Pre-tax profit 80,000
Less tax (24,000)
Profit after tax 56,000
Less dividends (20,000)
Retained profits 36,000
• Equity-accounted investment inInvestment

associate account
in A Ltd(20x2)
(Associate)
Cost of acquisition $100,000 Share of tax expense (Note 2) $7,200
Share of profit before tax (Note 1) 24,000 Dividend income (Note 3) 6,250
Share of translation reserves (Note 4) 25,425 Goodwill impairment (Note 5) 6,000
Depreciation on FV differential 600
Balance, 31 Dec 129,375
$149,425 $149,425
48
company
• Note 1: Share of profit before tax
FC Rate $
Associate’s profit before tax 80,000 1.20 96,000
Share of net profit (25%) 24,000
• Note 2: Share of tax expense

FC Rate $
Associate’s tax expense 24,000 1.20 28,800
Share of tax expense (25%) 7,200
• Note 3: Dividend income FC Rate $

Dividends paid 20,000 1.25 25,000
Share of dividends (25%) 6,250
49
company
• Note 4: Share of translation reserve
FC Rate $
Net assets brought forward 300,000 1.00 300,000
Add: Change in net assets
Net profit for the year 56,000 1.20 67,200
Dividends paid (20,000) 1.25 (25,000)
342,200 (A)
Net assets carried forward 336,000 1.25 420,000 (B)
Translation difference (B) – (A) 77,800 (gain)
Share of translation gain ($77,800 x 25%) $19,450

Add: Translation difference on goodwill (See Note 5) 5,500
Add: Translation difference on FV differential (See Note 6) 475
$25,425
50
company
• Note 5: Goodwill on acquisition and translation difference on goodwill
Cost of acquisition FC 100,000

Share of net assets (FC 300,000 x 25% x 1) 75,000
After tax FV differential of equipment (FC 10,000 x 1.00 x 25% x 0.8) 2,000
Goodwill FC 23,000
FC Rate $
Goodwill on acquisition 23,000 1.00 23,000
Less: Impairment loss (5,000) 1.20 (6,000)
17,000 (A)
Goodwill at year-end 18,000 1.25 22,500 (B)
Translation difference (B) – (A) 5,500 (gain)
51
company
• Note 6: FV differential on equipment
Equipment after tax FV differential on 1 Jan 20x2 $2,000

(FC 10,000 x 1.00 x 25% x 0.8)
Less: Depreciation from 1 Jan to 31 Dec 20x2 (600)
(FC 10,000/4 x 1.20 x 25% x 0.8)
1,400
Equipment FV differential on 31 Dec 20x2
(FC 10,000 x ¾ x 1.25 x 25% x 0.8) 1,875
Translation difference $475
52
company
• Analytical check on Investment in Associate (A Ltd) balance
Net assets of A Ltd at 31 Dec 20x2 FC 336,000

Investor’s share of net assets at 25% FC 84,000
Translated at closing rate @ 1.25 $105,000

Add: Goodwill (net of impairment loss) $22,500
Add: FV differential on equipment $1,875
Balance $129,375
53
company
• Equity Accounting entries on consolidation
Dr Investment in associate 16,800

Dr Share of tax expense (P&L) 7,200
Cr Share of profit before tax 24,000
To record share of associate’s profit and tax
Dr Dividend income (P&L) 6,250

Cr Investment in associate 6,250
To record effects of dividend on associate
Dr Share of profit before tax 6,000

Cr Investment in associate 6,000
To record impairment on goodwill arising from investment in associate
54
company
• Equity Accounting entries on consolidation
Dr Share of profit before tax 600

Cr Investment in associate 600
To record depreciation on FV differential in equipment
Dr Investment in associate 25,425

Cr Foreign currency translation reserve 25,425
To record foreign currency translation on investment in associate
55
Illustration 5: Change in functional currency
Scenario
• There is a prospective change in functional currency of a company from US$ to S$ on 31 Dec 2014 (Rate at 1.3)
• The company, a wholly owned subsidiary of its parent company, was incorporated on 1 Jan 2013 (presentation
currency of parent’s is S$)
• The exchange rate on incorporation date is 1.2
• Sales and expenses occur evenly throughout the two years
• Fixed assets were acquired on 1 Jan 2013
• No FCTR at 31 Dec 2014 as group presentation currency is S$ which is the same as company’s new functional
currency
2014 2013
Closing rate 1.3 1.25
Average rate 1.28 1.22
56
2013
2014 S$
2014 S$ 2013 Reported
US$ Reported US$ comparative
Income statement
Sales 100,000 128,000 120,000 146,400
Expenses (including tax) (78,000) (99,840) (90,000) (109,800)
Net profit after tax 22,000 28,160 30,000 36,600
57
2013
2014 S$
Statement of Changes in Equity
Share capital
Balance, 1 Jan 100,000 120,000 100,000 120,000
Translation adjustments - 10,000 - -
Balance, 31 Dec 100,000 130,000 100,000 120,000
Retained earnings
Balance, 1 Jan 30,000 36,600 - -
Net profit after tax 22,000 28,160 30,000 36,600
Translation adjustments - 2,840 - -
Balance, 31 Dec 52,000 67,600 30,000 36,600
58
2013
2014 S$
FCTR
Balance, 1 Jan - 5,900 - -
Translation adjustments
Opening net assets 6,500 5,000
Income during the year - 440 - 900
Effect of change in functional
currency
Adjustment of FCTR to share capital (10,000)
Adjustment of FCTR to RE - (2,840) - -
Balance, 31 Dec - (0) - 5,900
59
2013
2014 S$
Fixed assets 90,000 117,000 100,000 125,000
Inventory 80,000 104,000 45,000 56,250
Accounts receivable 43,000 55,900 50,000 62,500
Bank balances 10,000 13,000 4,500 5,625
223,000 289,900 199,500 249,375
Loan payable 50,000 65,000 50,000 62,500
Accounts payable 21,000 27,300 19,500 24,375
Share capital 100,000 130,000 100,000 120,000
Retained earnings 52,000 67,600 30,000 36,600
FCTR - - - 5,900
223,000 289,900 199,500 249,375
60
Illustration 6: Application of the LCNRV rule
• Parco, whose functional currency is the dollar ($) owns a subsidiary, Forsub, in
Country X, whose currency is the FC
• Forsub keeps its books in the local currency FC
• At 31 Dec 20x1, Forsub has inventories that cost FC 100,000, which were purchased
when the exchange rate was FC 1 = $1
Scenario 1: At 31 Dec 20x1, the NRV of inventories was FC 105,000 and the exchange
rate was FC 1 = $0.90
Functional currency of Forsub is the FC Functional currency of Forsub is the dollar ($)
Cost is lower than NRV From a group’s perspective, inventories are

recorded in foreign currency. Cost of the
Carrying value of the inventories in the group inventories measured at historical rate is compared
F/S is $90,000 with the NRV measured at closing rate
NRV is FC 105,000 x $0.90 = $94,500
Cost is FC 100,000 x $1.00 = $100,000
In the remeasured F/S, a loss of $5,000 is

recognized and carrying value of inventories in the
group F/S is $94,500
61
The remeasured historical cost of the inventories
($100,000) is greater than the remeasured NRV
(FC 88,000 x $0.90 = $79,200) in dollars.
Cost is higher than NRV
In the remeasured F/S, the loss of FC 12,000* in
Under the LCNRV rule, the inventories and a Forsub’s F/S is reversed before remeasurement is
writing-down loss of FC 12,000 is translated at undertaken to avoid double-counting.
the closing rate of $0.90 (= $10,800).
Inventories on the group F/S is FC 88,000 In the remeasurement process, a writing-down
translated at the closing rate (= $79,200) loss of $20,800 ($100,000 – 79,200) is recognized
and the inventories are carried in the remeasured
F/S at NRV ($79,200).
*Assume that a loss of FC12,000 was initially recognized. If remeasurement is properly applied by Forsub, this
reversal is not required
62
Cost is higher than NRV The remeasured historical cost of the inventories
($100,000) is lower than the remeasured NRV
Under the LCNRV rule, a writing-down loss of ($102,000).
FC 7,000 is recorded in Forsub’s books. The
loss of FC 7,000 is translated at the closing For the purpose of remeasurement only, the loss
rate of $1.10 (= $7,700). of FC 7,000 in Forsub’s F/S is reversed before the
remeasurement process.
Inventories on the group F/S is FC 102,300.
In the remeasured F/S, the inventories are carried
at cost ($100,000).
63
Illustration 7: Investment properties
• Functional currency of the entity Parco is the Singapore dollar (SGD)
• Parco holds Australian investment properties
• FV of investment properties are A$8 million and A$10 million on 31 December 2012 and 31 December 2013, respectively
• The A$/SGD exchange rates on 31 December 2012 and 31 December 2013 are 1.00 and 1.10 (1 A$:1.10 SGD), respectively
• The investment properties are accounted for using FV model under IAS 40
• FV of the investment property is translated at the exchange rate on the fair valuation date. The gain or loss on fair valuation of
the investment property includes both fair value changes and exchange gains/losses
Journal entry on 31 December 2013 is as follows:
Dr Investment property (10m x 1.10 – 8m x 1.10) S$3m

Cr Gain on fair valuation of investment S$3m
64
Illustration 8: Fixed assets
• Functional currency of the entity Parco is the Singapore dollar (SGD).
• Parco holds a building, for which it accounts for using the revaluation method under IAS 16.
• FV of the building are A$8 million and A$10 million on 31 December 2012 and 31 December 2013, respectively.
• The A$/SGD exchange rates on 31 December 2012 and 31 December 2013 are 1.00 and 1.10 (1 A$:1.10 SGD), respectively.
• The revaluation gain or loss on the building includes both fair value changes and exchange gains or losses.
Journal entry on 31 December 2013 is as follows:
Dr Building (10m x 1.10 – 8m x 1.10) S$3m

Cr Revaluation reserve S$3m
65
Illustration 9: Downstream sale to foreign subsidiary
Background information
P Co has a wholly-owned foreign subsidiary S Co
Functional currency of P Co S$
Functional currency of S Co US$
Financial year end 31-Dec
Transfer of inventory from P Co to S Co (settled in cash) 6-Jul-20x5

Transfer price S$100,000
Original cost S$85,000
Gross profit S$15,000
Re-sale by S Co to third parties
30 Sept 20x5 60%
8 Jul 20x6 30%
66
Exchange rates S$ to US$
6 Jul 20x5 1.24
30 Sept 20x5 1.3
31 Dec 20x5 1.32
8 Jul 20x6 1.36
31 Dec 20x6 1.38
20x5: Accounting entries in P Co’s books (S$)

Dr Cash S$100,000
Cr Sales S$100,000
Record sales to S Co on 6 Jul 20x5
Dr Cost of sales 85,000

Cr Inventory 85,000
Record cost of sales recognized on 6 Jul 20x5
67
20x5: Accounting entries in S Co’s books (US$)
Dr Inventory US$80,645
Cr Cash US$80,645
Purchase of inventory from P Co [100,000/1.24]

Cr Inventory 48,387
Cost of sales recognized for sales to third parties [80,645*60%]
68
20x5: Elimination of intra-group transaction
Dr Sales (P Co) 100,000

Dr FCTR 3,290
Cr Cost of sales (P Co) – Reverse unsold % 34,000
Cr Cost of sales (S Co) – Eliminate sold % 62,903
Cr Inventory (S Co) – Eliminate unrealized profit 6,387
Note 1 S$ US$
Unrealized profit in S Co’s inventory
Transfer price 100,000
Original cost (85,000)
15,000 12,097
Percentage unsold 4,839
69

Cr Inventory 24,194
Cost of sales recognized for sales to third parties on 8 Jul 20x6
Dr Opening RE 3,097
Dr FCTR 3,508
Cr Cost of sales (S Co) 4,935
Cr Inventory (S Co) 1,669
70
Illustration 10: Upstream sale to foreign subsidiary
Background information
P Co has a wholly-owned foreign subsidiary S Co
Functional currency of P Co S$
Functional currency of S Co US$
Financial year end 31-Dec
Transfer of inventory from S Co to P Co (settled in cash) 6-Jul-20x5

Transfer price US$100,000
Original cost US$85,000
Gross profit US$15,000
Re-sale by S Co to third parties
30 Sept 20x5 60%
8 Jul 20x6 30%
71
Exchange rates S$ to US$
6 Jul 20x5 1.24
30 Sept 20x5 1.3
31 Dec 20x5 1.32
8 Jul 20x6 1.36
31 Dec 20x6 1.38

Dr Cash US$100,000
Cr Sales US$100,000
Record sales to P Co on 6 Jul 20x5

Cr Inventory 85,000
Record cost of sales recognized on 6 Jul 20x5
72
Dr Inventory S$124,000
Cr Cash S$124,000
Purchase of inventory from S Co [100,000*1.24]

Cr Inventory 74,400
Cost of sales recognized for sales to third parties [124,000*60%]
73
Dr Sales (S Co) 124,000

Cr Cost of sales (P Co) – Eliminate sold % 74,400
Cr Cost of sales (S Co) – Reverse unsold % 42,160
Cr Inventory (P Co) – Unrealized profit (Note 1) 7,440
Note 1 US$ S$
Unrealized profit in P Co’s inventory
Transfer price 100,000
Original cost (85,000)
15,000 18,600
Percentage unsold 7,440
74

Cr Inventory 37,200
Cost of sales recognized for sales to third parties on 8 Jul 20x6
Dr Opening RE 7,440
Cr Cost of sales (P Co) 5,580
Cr Inventory (P Co) 1,860
75

Foreign Exchange

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Foreign Exchange

Uploaded by

Copyright:

Available Formats

Foreign exchange

Net Investment in Foreign Operation

Comprises: 31 December 20x2

Dr Exchange loss 10,000

Share capital 300,000

Net book value (FC) Annual depreciation

b. Prepaid insurance expired on 30 June 20x2

d. Land was revalued from FC 50,000 to FC 70,000 on 30 September 20x2

Income statement for years 31 Dec 20x1 31 Dec 20x2

Share capital 300,000 300,000

2. Relevant exchange rates are as follows:

• Two ways of determining the translation loss of $17,890

Exposed Items FC Rate $

Net assets b/f 332,000 0.81 268,920

Translation difference for the year (B – A) (17,890)

Net assets at start of the year 384,000 0.76 291,840

Note 2 – Depreciation expense

Note 3 – Insurance expense

2 Closing exposed monetary items:

Date Exchange rate

*Factor in FX translation on goodwill and FV differentials in reconciliation check for FCTR

USD Rate SGD

Net change as at 31 Dec 20x5 translated at CR 356,000 1.6 569,600

USD Rate SGD

USD Rate SGD

Goodwill at 1 Jan 20x3 94,000 2.10 197,400

Translation loss - (47,000)

Goodwill at 31 Dec 20x5 94,000 1.60 150,400

Goodwill attributable to SingCo 87,600 1.60 140,160

Goodwill attributable to NCI 6,400 1.60 10,240

94,000 1.60 150,400

Deferred tax liability arising from FV adjustment of inventory

Dr Retained earnings 9,200

Dr Dividend income 29,700

Total NCI’s share

Date Exchange Rate

• Equity-accounted investment inInvestment

• Note 2: Share of tax expense

• Note 3: Dividend income FC Rate $

Share of translation gain ($77,800 x 25%) $19,450

Cost of acquisition FC 100,000

Equipment after tax FV differential on 1 Jan 20x2 $2,000

Net assets of A Ltd at 31 Dec 20x2 FC 336,000

Translated at closing rate @ 1.25 $105,000

Dr Investment in associate 16,800

Dr Dividend income (P&L) 6,250

Dr Share of profit before tax 6,000

Dr Share of profit before tax 600

Dr Investment in associate 25,425

Cost is lower than NRV From a group’s perspective, inventories are

In the remeasured F/S, a loss of $5,000 is

Journal entry on 31 December 2013 is as follows:

Dr Investment property (10m x 1.10 – 8m x 1.10) S$3m

Journal entry on 31 December 2013 is as follows:

Dr Building (10m x 1.10 – 8m x 1.10) S$3m

Transfer of inventory from P Co to S Co (settled in cash) 6-Jul-20x5

20x5: Accounting entries in P Co’s books (S$)

Dr Cost of sales 85,000

Dr Cost of sales 48,387

Dr Sales (P Co) 100,000

Dr Cost of sales 24,194

20x6: Elimination of intra-group transaction

Transfer of inventory from S Co to P Co (settled in cash) 6-Jul-20x5