Consolidating foreign currency subsidiaries

Note: if the payment was made AFTER the year-end, the gain would be recorded in the subsequent year’s financial statements.

No exchange rate differences are accrued or prepaid which relate to settlement of foreign currency transactions after the reporting date.

This applies whether or not the transaction is covered by a forward foreign currency contract (which is different than the choice offered in SSAP 20 at paragraph 46 where an entity can record the transaction at the rate of exchange on the date of the transaction or the rate specified in the contract).

Example – purchase of goods from an overseas supplier A company based in the UK buys a batch of chemicals from its supplier based in Austria.

Care must be taken where average rates of exchange are employed because the paragraph does also recognise that where exchange rates have fluctuated significantly, the use of an average rate of exchange for a period will be inappropriate.

Example – foreign subsidiary which is not wholly-owned Top Co Limited owns 80% of Foreign Co Inc and has accumulated exchange differences which have been recognised in other comprehensive income.

Example – presentation currency Top Co Limited is the parent of a number of subsidiaries which operate throughout Germany, Spain and France, however the majority of the group’s turnover and profits are generated in the United Kingdom.

In a group situation, it is not uncommon for a foreign subsidiary to be a member of a group and paragraph 30.5 outlines various additional factors that are to be considered in determining the functional currency of a foreign operation which will then lead to the conclusion as to whether the functional currency is the same as that of the parent: A company may enter into a foreign exchange transaction with an overseas supplier whereby the transaction will be denominated in a foreign currency and will be settled in a foreign currency.

Examples include: On initial recognition, the transaction is accounted for using the rate of exchange prevailing on the date of the transaction.

A change in functional currency can only take place if there is a change to the underlying transactions, events and conditions which are pertinent to the entity.

This could arise, for example, where there is a change of currency (for example if the UK decided to adopt the Euro).

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The cost of the chemicals is €180,000 and the spot rate on the date of the transaction is £1 = €1.45.

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