Exchange rate adopt by subsidiary is differed from group exchange rate contained by group consolidation?
In group consolidation, group exchange rates are adopt to convert foreign subsidiares assets, liability and P&L. Problem arise when subsidiaries which stipulation to follow a goverenment deternmined exchange rate (E.g. Thailand requirements to follow the Bank of Thailand exchange rate). Exchange difference arise contained by expulsion of intra-group receivable and payable. Can anyone advocate what is the commonly permitted international accounting treatment for the above? Say for example, a parent company and a subsidiary have HKD and THB respectively as its functional currency. And the group presentation currency is also contained by HKD. There is USD1m intercompany payable from the subsidiary. The parent company booked the receivable using the group USD to THB rate of 30.00 whereas the subsidiary booked the payable using Bank of Thailand rate of 34.00. So, how are we going to concordat beside such exchange difference?
Answers:
1st, if the parent co.'s functional currency is HKD and the group's presentation currency is also HKD, the USD1m loan would hold be record contained by HKD surrounded by the parent's books cos that's its functional currency. In the parent's books, the THB rate is irrelevant.
2nd, you should be guided by IAS 21 The Effects of Changes within Foreign Exchange Rates.
The Thai sub. have THB as its functional currency and have to translate its complete set of financial statements to the group presentation currency, HKD. The foll. paras are relevant to the Thai sub.:
Translation to the Presentation Currency
38. An entity may present its financial statements in any currency. If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities next to different functional currencies, the results and financial position of respectively entity are expressed contained by a adjectives currency so that consolidated financial statements may be presented.
39. The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary discount shall be translated into a different presentation currency using the following procedures:
(a) assets and liability for respectively set off sheet presented (i.e. including comparatives) shall be translated at the closing rate at the date of that stability sheet;
(b) income and expenses for respectively income statement (i.e. including comparatives) shall be translated at exchange rates at the date of the transactions; and
(c) adjectives resulting exchange differences shall be recognised as a separate component of equity (what this resources is the exchange differences should jump to a Currency Translation Reserve surrounded by the Statement of Changes surrounded by Equity)
After you've done the above, your Thai sub. financial statements will be presented in HKD. If the interco. loan, very soon within HKD, still does not game the parent co.'s amt, the foll. paras are relevant to the parent co.:
15. An entity may hold a monetary item specifically receivable from or payable to a foreign operation (Foreign operation: A subsidiary, associate, amalgamated project, or branch whose comings and goings are base within a country excluding that of the reporting enterprise.) An item for which settlement is neither planned nor credible to materialize within the foreseeable adjectives is, contained by substance, a quantity of the entity’s network investment in that foreign operation, and is accounted for in accordance beside paragraph 32 and 33. Such monetary items may include long-term receivables or loans. (They do not include current a/c balance arising from typical trading.)
32. Exchange differences arising on monetary items that form segment of the reporting entity's network investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in a separate component of equity; they will be recognised in profit or loss (only) on disposal of the network investment.
So, as you can see, anything exchange diff. near are will be taken to a separate component of equity. Your Currency Translation Reserve (or similar name) will be a separate column surrounded by your Statement of Changes within Equity if you use a columnar format.
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Answers:
1st, if the parent co.'s functional currency is HKD and the group's presentation currency is also HKD, the USD1m loan would hold be record contained by HKD surrounded by the parent's books cos that's its functional currency. In the parent's books, the THB rate is irrelevant.
2nd, you should be guided by IAS 21 The Effects of Changes within Foreign Exchange Rates.
The Thai sub. have THB as its functional currency and have to translate its complete set of financial statements to the group presentation currency, HKD. The foll. paras are relevant to the Thai sub.:
Translation to the Presentation Currency
38. An entity may present its financial statements in any currency. If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities next to different functional currencies, the results and financial position of respectively entity are expressed contained by a adjectives currency so that consolidated financial statements may be presented.
39. The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary discount shall be translated into a different presentation currency using the following procedures:
(a) assets and liability for respectively set off sheet presented (i.e. including comparatives) shall be translated at the closing rate at the date of that stability sheet;
(b) income and expenses for respectively income statement (i.e. including comparatives) shall be translated at exchange rates at the date of the transactions; and
(c) adjectives resulting exchange differences shall be recognised as a separate component of equity (what this resources is the exchange differences should jump to a Currency Translation Reserve surrounded by the Statement of Changes surrounded by Equity)
After you've done the above, your Thai sub. financial statements will be presented in HKD. If the interco. loan, very soon within HKD, still does not game the parent co.'s amt, the foll. paras are relevant to the parent co.:
15. An entity may hold a monetary item specifically receivable from or payable to a foreign operation (Foreign operation: A subsidiary, associate, amalgamated project, or branch whose comings and goings are base within a country excluding that of the reporting enterprise.) An item for which settlement is neither planned nor credible to materialize within the foreseeable adjectives is, contained by substance, a quantity of the entity’s network investment in that foreign operation, and is accounted for in accordance beside paragraph 32 and 33. Such monetary items may include long-term receivables or loans. (They do not include current a/c balance arising from typical trading.)
32. Exchange differences arising on monetary items that form segment of the reporting entity's network investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in a separate component of equity; they will be recognised in profit or loss (only) on disposal of the network investment.
So, as you can see, anything exchange diff. near are will be taken to a separate component of equity. Your Currency Translation Reserve (or similar name) will be a separate column surrounded by your Statement of Changes within Equity if you use a columnar format.