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Hi Mike.
Suppose this is the first year of an audit for a start-up company:
The profit is 10,000 ZAR as at 31/12/2014. The financial statements will show both currencies in the financial statements (ZAR alongside the USD). Supposing, no dividends are to be paid, the balance in the retained earnings figure will also be 10,000 ZAR.The central bank rate as at 31/12/14 is (1 USD = 19 ZAR) and the average rate (average of 1/1/2014 and 31/12/14 divide by 2) = 17 ZAR . The profit figure in the p&l is going to be=
10,000 divide by 17, right?
However, when taking the balance in retained earnings in the BS , I should present it as 10,000 divide by 19 or by 17. If its the latter, where is the difference supposed to go?
Exchange difference account / other comprehensive income / statement of changes in equity
Hi Mike.
Plz help me with this statement
Same functional currency as the reporting entity (IAS 21)
Any movement in the exchange rate between the reporting currency and the foreign operation’s currency will have an immediate impact on the reporting entity’s cash flows from the foreign operations. In other words, changes in the exchange rate affect the individual monetary items held by the foreign operation, not the reporting entity’s net investment in that operation.
Is this a past exam question? My interpretation is that any change that results from exchange rate movement is to be adjusted in the subsidiary’s records rather than be treated as an aggregate “foreign exchange difference account”
Does that tally with the answer in the book
HI MIKE.
No, actually it’s from the text book. Below is the extract
Same functional currency as the reporting entity
In this situation, the foreign operation normally carries on its business as though it were an extension of the reporting entity’s operations. For example, it may only sell goods imported from, and remit the proceeds directly to, the reporting entity. Any movement in the exchange rate between the reporting currency and the foreign operation’s currency will have an immediate impact on the reporting entity’s cash flows from the foreign operations. In other words, changes in the exchange rate affect the individual monetary items held by the foreign operation, not the reporting entity’s net investment in that operation.
3.1.2 Different functional currency from the reporting entity
In this situation, although the reporting entity may be able to exercise control, the foreign operation normally operates in a semi-autonomous way. It accumulates cash and other monetary items, generates income and incurs expenses, and may also arrange borrowings, all in its own local currency. A change in the exchange rate will produce little or no direct effect on the present and future cash flows from operations of either the foreign operation or the reporting entity. Rather, the change in exchange rate affects the reporting entity’s net investment in the foreign operation, not the individual monetary and nonmonetary items held by the foreign operation.
I believe that the final sentence says it all – changes in exchange rate affects the parent’s net investment in the foreign subsidiary rather than affecting the individual monetary and non-monetary items within the subsidiary’s own records
There must be some explanation within the text book! The paragraphs are too obtuse to be left without explanation or illustration
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