Foreign exchange - subsidiaries 2 / 3

Foreign Exchange - Subsidiaries

Basic Idea: We need to translate the Foreign Sub into the Group Currency

Exchange rates to be used:

  1. Assets and Liabilities - Year End Rate

  2. Income Statement - Average Rate

  3. All forex differences go to the OCI and Reserves (Translation Reserve)

Equity Table - Working

First simply do this in the FOREIGN currency (ignore the post acquisition column) and then translate it at the following rates:

  • At Year End column - Year End Rate

  • At Acquisition column - Acquisition Rate

  • Now do the post-acquisition column - using the translated figures

Foreign Exchange Translation Reserve

How to calculate the Translation differences:

This can be calculated as follows:

Translation Reserve

Opening NA (@ opening rate)(x)
Profit (@ average rate)(x)
Balancing Figure (Forex Diff)X
Closing NA (@ closing rate)x

Goodwill - Working

Goodwill (in foreign currency)

  • Step 1: Work Goodwill in the FOREIGN currency

  • Step 2: Translate the final figure at Acquisition Rate

  • Step 3: Translate any impairment at the average rate for when it happened

  • Step 4: Translate final goodwill figure at the Year End Rate (This is what shows on the SFP)

  • Step 5: Any balancing difference goes to the OCI and Translation reserve in Equity 

    (nb. The NCI also get their share if using the FV method)

Consideration120,000
NCI27,000
FV of Net Assets Acquired(130,000)
Goodwill17,000

Step 1:Take 17,000 and translate it at the Acquisition rate

e.g. 17,000 x 0.5 = $8,500

Step 2:No Impairment so no translation of it needed

Step 3:Now take the 17,000 and translate it at the Year-end rate.

e.g. 17,000 x 0.6 = $10,200

The $10,200 is shown in the group SFP and the gain of $1,700 is taken to OCI and the Translation Reserve

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