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Hello,
In foreign subsidiaries, how do I know if the exchange differences I found are gain or loss? For example the profit for the year is 100 but the difference between y/e retained earnings and opening is 500. so the exchange difference is 400 and it is gain? Why is it gain, not a loss? What is the logic?
Thank you
Hello,
In my opinion, exchg differences arise mainly due to transactions in different currencies, e.g. USD & Crowns
For instance, the foreign subsidiary purchases Inventory from Parent company, at 6,000 Crowns on 1 Jan 2001. So here you have to perform normal journal entries at the rate prevailing on 1 Jan 2001, e.g. 1 USD = 2 Crowns, then it will be USD 3,000.
Given that the subsidiary has not yet settled the amount at year end, as per IAS 21, you will have to retranslate the 6,000 Crowns, at the rate prevailing on 31 Dec 2001 (e.g. 1 USD = 2.2 Crowns), then it will be USD 2,727.
Hence, the payables (amount owed to parent) in the foreign sub fs will decrease from USD 3,000 to USD 2,727 = USD 273 which is the exchange gain, because the subsidiary will be owing less to the parent.
Hope that helps.(Correct me if am wrong)
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