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Hi
I hope this question isn’t rubbish, it’s been driving me nuts all day.
In June 15, Q1 Note 6 states the below
Kutchen has impairment tested its non-current assets. It was decided that a building located overseas was
impaired because of major subsidence. The building was acquired on 1 April 2014 at a cost of 25 million dinars
when the exchange was 2 dinars to the dollar. The building is carried at cost. At 31 March 2015, the recoverable
amount of the building was deemed to be 17·5 million dinars. The exchange rate at 31 March 2015 is
2·5 dinars to the dollar. Buildings are depreciated over 25 years.In the solution the depreciation is calculated as D25-(D25/25)/2 = $12.
This in effect means that the depreciation is calculated at the acquisition (historical) rate at which the asset was purchased. I know as a non-monetary asset held at cost we do not restate the value in functional currency but since the depreciation hasn’t yet ocurred at 31/3/15 it doesn’t seem correct to use the rate as at that date? Shouldn’t it be the average rate across the period?
Many thanks for your help with this
Hi,
We only use the average rate when translating the results of a foreign subsidiary’s statement of profit or loss to convert the results to the presentational currency of the group. This is not happening in this scenario.
Here the parent has acquired an item of PPE that is not in its functional currency, so we need to translate it at the historic rate on acquisition (25 million dinars/ 2 dinars to the dollar), to give $12.5 million.
Once we have recorded it in the parent’s books in the functional currency we then depreciate it as normal over the 25 years ($12.5 million/25 years), to give $0.5 million per annum. This then gives the carrying value before any impairment of $12 million ($12.5 million – $0.5 million).
Essentially we are first dealing with a transaction in the individual company accounts, which is then consolidated.
Thanks
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