Consolidating foreign currency subsidiaries
If, say, 80% of a group’s profit is generated by European subsidiaries whose functional currency is the Euro, (despite the fact that the group has other functional currencies such as US Dollars and Canadian Dollars), it may adopt the Euro as its presentation currency for the purpose of consolidated financial statements.In situations where an entity’s presentation currency differs from the entity’s functional currency, the entity must translate its items of income and expense and financial position into the presentation currency.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.Please note, such monetary items may include long-term debtors or loans but they DO NOT include trade debtors or trade creditors.Any exchange differences that arise on a monetary item which forms part of a reporting entity’s net investment in a foreign operation is recorded in profit or loss in the individual financial statements of the reporting entity or the individual financial statements of the foreign operation (as appropriate).The cost of the chemicals is €180,000 and the spot rate on the date of the transaction is £1 = €1.45.The company does not have credit facilities with this supplier.
Paragraph 30.19 does recognise that for practical reasons, an entity may use average rates of exchange, particularly to translate income and expense items.
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).
Any fair value adjustments to the carrying amount of assets and liabilities arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation.
Assets and liabilities for each statement of financial position presented (which must also include the comparatives) should be translated from the functional currency to the presentation currency at the closing exchange rate at the reporting date.