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Hi
I am working on the topic 8 project and I have chosen two companies whose reporting currencies are not same, one is in Sterling, one in Euros. To make my financial analysis comparable, I have translated the P&L and the Balance sheet at the closing rate at the year end date.
Now, I now that IAS 21 has certain rules about how each type of transaction is converted, but I don’t have all the information to do so, and I was wondering whether my approach is acceptable for the use in my research project.
I would really appreciate your help on this.
Thank you
If I where you, I would choose two companies in the same countries, otherwise the analysis could be complex…
IAS 21 – Translation to Presentation Currency:
All assets and liabilities translated at the closing rate as at the date of the statement of financial position
All income and expenditure translated at the transaction date, however the average rate can be used provided this is not the translation of a hyper-inflationary economy.
All movements are shown in equity under a reserve (sometimes called accumulated surplus)In this way, the ratios involving assets, liabilities and income statement items will not vary upon changing the currency. This being the case your ratio analysis will be comparable. The only problem is that economic factors in the two economies may impact the overall results in a heterogeneous way. I suspect this may not be too much of a problem from sterling to euro or vice versa as the two economies are intrinsically linked.
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