1. Profile photo of Swati says

    Hi Sir,

    A small thing I had to ask here:
    I understood that closing bal of borrowings has increased due to the change in Foreign currency rate. But why do we not make any adjustment in the Interest Part?
    Alpha has charged $ 5000 million as Finance cost to P/L. But actually, the charge should be 58800 x 11.1% = 6527 $ Isn’t it? But the solution is showing nothing with respect to the finance cost.

    Its an adjustment of Cons. B/S (June 2012 ,DipIFR)
    Note 8 – Long-term borrowings The long-term borrowings of Alpha arose on 1 April 2011 when Alpha borrowed €50 million. Alpha incurred issue costs of €1 million. The exchange rate at 1 April 2011 was $1·20 = €1. On 1 April 2011 Alpha included $60 million in long-term borrowings and charged $1·2 million to comprehensive income.

    The borrowing requires Alpha to make annual interest payments in arrears of €4 million. The exchange rate on 31 March 2012 was $1·25 = €1. Alpha therefore charged a finance cost of $5 million to comprehensive income on 31 March 2012.

    The loan is repayable by Alpha on 31 March 2016 at an amount of €58 million. The effective annual interest rate applicable to this loan is 11·1%. Other than as described in this note, Alpha has made no other accounting entries relating to this loan. You can ignore the deferred tax implications of any adjustments you make due to the information in this note.

    I have done it like this:
    Op. Bal Interest Paid Effective Interest @ 11.1% closing Bal
    49,000 € (4000 € ) 49,000×11.1%= 5439 € 50,439 €

    Translated into $
    58,800 $ (5000 $ ) 58,800x 11.1% = 6527 $ 50,439x 1.25= 63,049
    op. rate cl. rate cl. rate

    So, should we not charge $ 6,527 to P/L (and reduce from Cons. Ret Ears) and do the reversal of $ 5,000 which has been charged by Alpha.

    Reporting date is: 31 March 2012.

    • Profile photo of MikeLittle says

      Yes, all foreign denominated values at converted but, in the case of cash, I have visions of €32 in a cash box in the cashier’s office left over from a director’s visit to a European client. You wouldn’t bother converting that on the grounds of immateriality. In practice the cashier would, with permission, put £20 from their own funds and take the euros in readiness for their own foreign holiday next year.

      In fact, in practice, those euros wouldn’t even leave the director’s possession! They would be explained away as “incidental expenses where I was not able to get a receipt”! (coffee from a coffee machine or parking where the ticket machine ate your ticket whilst lifting the barrier for you to drive out from the car park)

      Translation of the currency is unrealised

      Please, in future, post questions like this on the Ask the Tutor page

  2. Profile photo of MikeLittle says

    The opening inventory is DEBITED to statement of profit or loss – whatever makes you think that it’s credited?

    The figure for the statement of financial position is the one on the debit side below the total lines


  3. Profile photo of fahim231 says

    hello sir – in relation to your inventory T account – is opening inventory credited to the income statement? and which figure of the account would you put in the balance sheet?

  4. avatar says

    so what about if it was sale of goods at a contracted in ex 1 instead of purchase?

    then we will take into account of exchange difference between the contracted rate and the amount that should have been paid at the date of settlement ? as now it is the entity who will suffer the loss or gain due to exchange rate changes?

      • avatar says

        so no gain or loss on contracted rate will be recorded in any situation (purchase or sale) ?

        and also what happens when there is
        a) partial disposal (no loss of control)
        b) loss of control
        b) full disposal of a foreign subsidary

        i read it in the book that the gain/loss on exchange difference is recycled back from OCI to I/S.. how much do we recycle in each of the above situations?

        thank you sir

      • avatar says

        and i have a problem again :D..

        on the partial disposal of a foreign subsidary, the entity shall re-attribute the proportionate share of the cumulative amount of exchange differences recognised in OCI to the NCI in that foreign operation.

        tell me if i am correct?

        this para means that if for eg. the exchange difference gain in OCI was $10. disposal of 20% (previously had 50%) then

        10*20% = $2 will be recycled back to P/L and the $8 remaining in the OCI will be re attributed between the NCI and Parent?

        If yes, then what will be the NCI amount?
        if no, then please explain me with a help of a better example 😀

        thank you so much

      • Profile photo of MikeLittle says

        What on earth can you possibly be thinking?

        How were we consolidating a company as a subsidiary when we held only 50% (IFRS10 excepted) and following disposal of 20, our holding is now 30% with a 70% NON-CONTROLLING interest?

        Come on Shreya, you can do better than that!

      • avatar says

        Now can you imagine the stress level :( lol.. How about..
        A) when there is a loss of control 70% down to 40%
        B) no loss of control 70% down to 60%

        Exchange gain in OCI $20.

        PS. I know there is no cons. at 30% .. I only want to know how all this will affect the recycling of exchange and loss from OCI to p/l … And what happen to NCI share as per above pars of re-attribution of the cumulative fig.

        Thank you :)

      • Profile photo of MikeLittle says

        In a situation of a mere transfer between owners (70% down to 60%) and provided the nci originally had been valued at full, fair value, then the amount paid by the nci to increase their share will include within the purchase cost an element for the purchase of a share of goodwill.

        In that situation, the goodwill is simply shifted sideways from one part owner to another part owner

        Where a sale is made and we lose control of the subsidiary, the value of the holding retained in the (now) associate is the base from which Investment in Associate is then built.

        That value of the remainder of the original holding in a subsidiary is included within the working to calculate the profit / loss achieved / sustained on the disposal of the subsidiary.

        Upon that disposal, the figure for all the goodwill is included in the calculation of the fair value of the net assets at date of acquisition (beware if nci was proportional) in order to arrive at the profit or loss on the disposal

        Does that now do it?

    • Profile photo of Swati says

      Thanks for your reply.

      The examiner has written the following solution:

      Under the provisions of IAS 21 – the effects of foreign exchange rates – the loan interest has been correctly treated, being translated at the rate of exchange in force at the date the transaction occurred. However the exchange difference of 2,000 on the loan should be included in the income statement under finance costs rather than being taken to equity.

      So, what i have understood from this is:
      Exchange difference on ‘Loan’ (which is a monetary item) will be taken to finance costs in Profit & Loss statement? Right?


  5. Profile photo of Swati says

    Dear Sir,

    There was a past year question (June 2008). In it, Note #5 says:

    Note 5
    On 1 April 2007 Kappa borrowed 40 million euros for 20 years at a fixed annual rate of interest of 6%, payable in arrears. Relevant exchange rates ($ to 1 euro) are:
    1·2 on 1 April 2007.
    1·25 on 31 March 2008.
    The draft financial statements have included interest payable of $3 million (2·4 million euros x 1·25) in the income statement and an exchange loss on the loan of $2 million (40 million euros x ($1·25 – $1·20)) in the statement of comprehensive income.

    I have understood the treatment of $3 mn (interest payable). Could you please explain what to do of $2 mn & How do we treat this $2 mn in the accounts?

  6. Profile photo of chandhini says

    Hello sir,
    I just wanted to confirm the following:
    1) When we hold a property abroad, which is classified under IAS16 Revaluation model, then, any increase in the value at the year end goes to OCE, whereas any decrease goes to RE
    2) Any changes in value of monetary assets/liabilities denominated in foreign currency go through RE, AND
    3) When we retranslate sub’s assets, the gain/loss goes to RE, while the gain/loss on the Goodwill goes to OCE! ( though the text says the entire difference should go through OCI, this is how it has been treated in the BPP kit)
    Please let me know if I am right with respect to the above!
    Thanks a ton!

  7. Profile photo of pannanikt says

    I have a word of explanation for Mike. I have been an accountant in Poland and now I am an accountant in the UK so have some understanding about both inventory and COS concepts. I think UK way is more difficult to really control the stock. In Poland purchases go to inventory and should be there until sale. Then you have the stocktaking at year and and can compare both records to discover missing/stolen/destroyed items. In Poland people working at warehouse-the employee are personally financially responsible for the inventory and are charged by employer if something is missing. Sometimes they have a limit of acceptable losses in inventory but employees should know this figure. In UK you put everything to purchases and deduct the closing stock but then you lose the info what should have been in the stock but it’s not there. It does not mean automatically that it is the purchase. Only because something is not in stock at the end of the year does not mean it is the cost of sale. In UK your HMRC is more people friendly and it is why the cost control is more relaxed, and employers are more keen to put everything as company expenses and employees are not financially charged for losses even if it is cash. UK attitude is that in general people are honest until you prove they are not. In Poland the attitude is that in general people lie and steal until they prove they are honest.

    • Profile photo of MikeLittle says

      Thank you Pannanikt for sharing with us all your insight into something which I personally find no problem with. In fact, my only problem in this area is understanding how a Continental Cost of Sales Account works – I simply cannot get my head around the mechanics of the double entry involved and, before any of you helpful readers tries to explain it, I really do not want to know (you can’t teach an old dog new tricks)

  8. avatar says

    for P2 it’s just an inventory account on the SFP – I think the COS A/c is something specific to the country where the lectures took place?
    I skimmed over that part until he got back to the question!! :-)

  9. avatar says

    Hi the $25,806 is the original transaction value with Potter ($80,000), divided by the exchange rate at time of actual payment (3/2/10) $1 = 3.1 litas.

    80,000 / 3.1 = 25,806.
    Basically we had a payable at year-end of 28,571, but the rate has moved in our favour between year-end and actual payment.
    The difference between the year-end payable 28,571 and amount actually paid 25,806 becomes income in the new financial year as the payable is fully discharged

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