Question

1. What rates are used to translate the following:

1. the assets and liabilities of a foreign operation?
2. the share capital and pre-acquisition reserve of foreign operation?
3. the income and expenses of a foreign operation. Is there any exceptions allowed?

2. Explain the exchange differences that arise:

(a) on translating the financial statements of a foreign operation;

(b) on the preparation of the resultant consolidated financial statements.

3. What is the accounting treatment for exchange differences which arise under the presentation currency method?

Answer 1

1. The assets and liabilities rate of a foreign operation are translated using the current exchange rate at the balance sheet date.

The share capital and pre-acquisition reserve of foreign operation are recognised in other comprehensive income.

The income and expenses rate of a foreign operation are translated using the exchange rate as of the dates when those items were originally recognized.

2. (a) Exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes on Income.

(b) Exchange differences that arise on the preparation of the resultant consolidated financial statements. shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. Exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment in accordance with paragraph 48 of the AS 21.