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.
However, there will still be exchange rate gain of EUR 50 reported in the subsidiary’s profit or loss. Let’s say that the settlement of the loan is not likely to occur in the foreseeable future and therefore, the loan is a part of the net investment in a foreign operation.For example, let’s say that the German company was established on 10 September 2010 with the share capital of EUR 100 000.Then, on 3 January 2015, the German company was acquired by the UK company.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.Therefore, the share capital amounts to GBP 78 000, rather than GBP 82 340.If the equity balances result from the transactions with shareholders (for example, share premium), then it’s appropriate to apply the historical rate consistently with the rate applied for the share capital.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?It’s true that the standard IAS 21 is silent on this matter. Some time ago, the exposure draft proposed to translate the equity items at the closing rate, but it was not included in the standard. It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included.It means that in most cases, companies decide whether they apply closing rate or historical rate. In my own past practice, I’ve seen both cases – closing rates and historical rates, too. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Let me describe what’s the most appropriate in my opinion, but please remember, that it results from the practice and common sense, not from the rules (as there are none).