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Consolidation procedures
An entity that is included in the consolidated financial
statements of a reporting entity frequently has
a functional currency that is different from the
presentation currency of the group's consolidated
financial statements.
All entities that have a different functional currency
from the group presentation currency must translate
their financial information into the group presentation
currency [IAS21R.18].
The method used to translate the financial statements
from the functional currency to the group's presentation
currency depends on whether the functional currency
of the foreign operation is the currency of a hyperinflationary
economy or not.
If the functional currency of an entity is not
hyperinflationary, the entity translates balance
sheet items, including comparatives, at the closing
rate of the respective balance sheet date. Items
of income and expenses are translated at the rates
prevailing at the dates of the transactions or at
an average rate. The resulting exchange differences
are recognised in a separate component of equity
[IAS21R.39-41].
If the functional currency of an entity is hyperinflationary,
all items of the balance sheet and of the statement
of profit or loss, including comparatives, are translated
at the closing rate at the date of the most recent
balance sheet. If the presentation currency is not
hyperinflationary, the comparative amounts are those
that were presented in the previous year [IAS21R.42-43].
Goodwill and fair value adjustments
Goodwill arising on the acquisition of a foreign
operation and fair value adjustments are treated
as assets / liabilities of the foreign operation
and are expressed in the functional currency of
the foreign operation. Goodwill and fair value adjustments
are translated at the closing rate in the same manner
as any other assets and liabilities .
Intra-group monetary items
Intra-group balances, transactions, income and expenses
between a reporting entity and a foreign operation
are eliminated as part of the normal consolidation
procedures (see IAS 27 Consolidated and Separate
Financial Statements and IAS 31 Interests in Joint
Ventures).
An intra-group monetary asset or liability that
is between two entities with different functional
currencies creates a foreign currency exposure.
It is not eliminated in the consolidated financial
statements because the monetary item can only be
denominated in one currency. This creates a foreign
currency gain or loss in the entity with the different
functional currency [IAS21R.45]. These gains or
losses remain in the consolidated income statement.
Exchange differences that arise on a monetary item
that forms part of a reporting entity's net investment
in a foreign operation are transferred from profit
or loss to equity in the consolidated financial
statements (i.e. quasi-equity loans) [IAS21R.15]
[IAS21R.32].
Different reporting dates
IAS 27
allows the use of different reporting dates in the
consolidation of subsidiary companies, provided
that the difference in the reporting dates is not
greater than three months and adjustments are made
for the effects of any significant transactions
or events that occur between the different dates.
The assets and liabilities of a foreign operation
are translated at the exchange rate at the balance
sheet date of the foreign operation. Adjustments
are made for significant changes in exchange rates
up to the balance sheet date of the reporting entity
in accordance to IAS 27 [IAS21R.46] .
Minority interests
A reporting entity will disclose minority interest
in its consolidated financial statements , when it controls a foreign operation
that is not wholly owned. The accumulated exchange
differences arising from translation which are attributable
to minority interests should be allocated to, and
reported as part of, the minority interest in the
consolidated balance sheet [IAS21R.41].
Disposal and partial disposal of an interest
in a foreign operation
The cumulative amount of deferred exchange differences
related to a foreign operation is transferred from
equity to the income statement when the gain or
loss on disposal is recognised [IAS21R.48]. Disposal
of a foreign operation may be in the form of a sale,
liquidation, repayment of share capital, or abandonment
of all or part of the entity. Only a proportionate
share of the related accumulated exchange differences
is recognised in the case of a partial disposal.
A dividend paid by the foreign operation is a partial
disposal if it constitutes a return of the investment
[IAS21R.49]. A dividend represents a return of investment
to the extent that cumulative dividends paid from
the foreign operation exceed accumulated and previously
undistributed net profits since its acquisition.
Reductions in the entity's net assets resulting
from losses or impairments of assets are not considered
a partial disposal
.
Disclosure
There are no specific disclosure requirements in relation
to the translation of foreign operations .
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