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Steps consolidating foreign subsidiary
It stays there and it will become a part of a consolidated profit or loss, because it reflects the foreign exchange exposure resulting from foreign trade. On the consolidation, the exchange rate gain of EUR 50 recorded in the German financial statements in profit or loss (together with the difference that arises on translation of the EUR 50 by the average rate).
It is translated at the transaction date rate, i.e. At the reporting date (), the consolidated financial statements show: Please note the little trick here.
If the German subsidiary does NOT sell the inventories to the parent, but keeps them at its own warehouse – what would their amount for the consolidation purposes be?
If not, then apply the average rates for the period. Here, IAS 21 is silent again, but in my opinion, the most appropriate seems to apply the rate ruling at the transaction date. So, let’s say the German subsidiary sold the goods to the UK parent on 30 November 2016 for EUR 5 000.
They remain unsold in the UK warehouse at the year-end.
For the share capital, the most appropriate seems to apply the , rather than the historical rate applicable when the share capital was issued.
The reason is that it’s easier and logical to fix the rate at the date of the acquisition when the goodwill and/or non-controlling interest are calculated.In today’s world, most groups spread their activities abroad and logically different members of the group operate in different currencies.Is the consolidation process of combining the financial statements of two (or more) companies different when they operate in different currencies? If you want to combine the financial statements prepared in different currencies, you will still follow the same consolidation procedures.The exchange rates were 0,8234 GBP/EUR on 10 September 2010, and 0,78 GBP/EUR on 3 January 2015.When the UK parent translates German financial statements to GBP for the consolidation purposes, the share capital will be translated at the historical rate applicable on 3 January 2015.Be careful – this is the translation of a foreign currency payable to a functional currency, hence nothing to do with the consolidation.Re-translated payable amounts to EUR 11 680 (10 000/0,8562) and the German subsidiary records the foreign exchange gain of EUR 50: When the German company translates its financial statements to a presentation currency, then the intragroup trade payable of EUR 11 680 is translated to GBP using the closing rate of 0,8562 – so, it amounts to GBP 10 000 (11 680*0,85618). The only difference is that there was no intragroup sale of inventories.If you translate the financial statements using different foreign exchange rates, then the balance sheet would not balance (i.e. Therefore, CTD, or currency translation difference arises – it’s a and shows the difference from translating the financial statements in the presentation currency.If you translate the financial statements to a presentation currency for the purpose of consolidation, you need to be careful with certain items.If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Please note that the above table applies when neither functional nor presentation currency are that of a hyperinflationary economy.Actual rates are the rates at the date of the individual transactions, but you can use the average rate for the year if the actual rates do not differ too much.