International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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proportionate interest in the foreign operation. However, the Interpretations Committee
has indicated that a partial disposal may also be interpreted to mean an absolute reduction
in ownership interest16 (other than those indicated above), for example the repayment by
a foreign operation of a permanent as equity loan made to it by the reporting entity.
Accordingly, in our view, entities will need to apply judgement and select an appropriate
accounting policy for determining what constitutes a partial disposal.
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6.6.2.B
Partial disposal of a proportionate interest in a subsidiary
On the partial disposal of a proportionate interest in a subsidiary that includes a foreign
operation, the proportionate share of the cumulative amount of exchange differences
recognised in other comprehensive income should be reattributed to the non-
controlling interests in that foreign operation. [IAS 21.48C]. In other words, these exchange
differences will not be reclassified to profit or loss. Further, if the entity subsequently
disposes of the remainder of its interest in the subsidiary, the exchange differences
reattributed will not be reclassified to profit or loss at that point either (see 6.6.1 above).
6.6.2.C
Repayment of a permanent as equity loan by a subsidiary
Where an entity considers the repayment by a subsidiary of a permanent as equity
loan a partial disposal (see 6.6.2.A above), IAS 21 is unclear whether related foreign
currency differences should be reclassified from equity to profit and loss.
Consequently, in our opinion, entities should select an appropriate accounting policy
and apply that policy consistently.
In our experience the most commonly applied policy is for entities not to reclassify
exchange differences in these circumstances. This is consistent with the explicit
requirements of IAS 21 which require only that an entity reattribute to the non-
controlling interests any exchange differences in that foreign operation. [IAS 21.48C].
However, in analysing the issue for the Interpretations Committee in 2010, the IFRIC
staff indicated, albeit without any technical analysis, that in their opinion exchange
differences should be reclassified to profit or loss on settlement of such a monetary
item.17 The Interpretations Committee, which did not take the issue onto its agenda,
noted that diversity may exist in practice18 and, consequently, we also consider this
treatment to be an acceptable policy choice. A logical extension of this accounting
policy choice would involve reclassifying exchange differences as a result of similar
transactions, for example the repayment of share capital by a foreign subsidiary.
6.6.2.D
Partial disposal of interest in an associate or joint arrangement
In a partial disposal of an associate or joint arrangement where the retained interest
remains or becomes an associate or joint arrangement, the proportionate share of the
cumulative amount of exchange differences recognised in other comprehensive income
should be reclassified from equity to profit or loss. [IAS 21.48C]. There is an equivalent
requirement in IAS 28 applying to all gains and losses recognised in other comprehensive
income that would be reclassified to profit or loss on disposal of the related assets or
liabilities. [IAS 28.25]. In this context, the Interpretations Committee has concluded that this
treatment applies however an investor’s ownership interest is reduced, for example if an
associate that is a foreign operation issues shares to third parties.19
Whether the repayment by an associate or joint arrangement of a permanent as equity
loan made to it by the reporting entity results in reclassification of exchange differences
to profit or loss depends on whether the reporting entity considers such a transaction
to represent a partial disposal (see 6.6.2.A above). In other words it will be an entity’s
accounting policy choice.
Foreign
exchange
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6.6.3
Comparison of the effect of step-by-step and direct methods of
consolidation on accounting for disposals
We illustrated the basic requirement to reclassify cumulative exchange differences from
equity to profit or loss on the disposal of a foreign operation in Example 15.17 at 6.6.1.A
above where a parent sold a direct interest in a subsidiary. This requirement also applies
on the sale of an indirect subsidiary. However, where the intermediate holding company
and the subsidiary each have different functional currencies, the method of
consolidation can have an impact on the amount of exchange differences reclassified
from equity to profit or loss on the disposal of the subsidiary.
If the step-by-step method is used, this amount will have been measured based on the
functional currencies of the intermediate holding company and the subsidiary. The
translation of that amount into the presentation currency of the ultimate parent will not
be the same as if the ultimate parent had consolidated the subsidiary individually. In this
second case (the direct method), the exchange differences on translation of the
subsidiary would have been measured based on the functional currency of the
subsidiary and the presentation currency used by the ultimate parent. This is illustrated
in the following example.
Example 15.19: Disposal of an indirectly held foreign operation
On 1 January 2018, Entity A is incorporated in the UK with share capital of £300m. It sets up a wholly-owned
Swiss subsidiary, Entity B, on the same day with share capital of CHF200m. Entity B in turn sets up a wholly-
owned German subsidiary, Entity C, with share capital of €45m. All of the capital subscribed in each of the
entities, to the extent that it has not been invested in a subsidiary, is used to acquire operating assets in their
country of incorporation. The functional currency of each of the entities is therefore pound sterling, the Swiss
franc and the euro respectively. The relevant exchange rates at 1 January 2018 are £1=CHF2.50=€1.50.
For the purposes of the example, it is assumed that in the year ended 31 December 2018 each of the entities
made no profit or loss. The relevant exchange rates at that date were £1=CHF3.00=€1.25.
On 1 January 2019, the German subsidiary, Entity C, is sold by Entity B for €45m.
The exchange differences relating to Entity C that will be reclassified from equity to profit or loss in the
consolidated financial statements of the Entity A group for the year ended 31 December 2019 on the basis
that each of the subsidiaries are consolidated individually (the direct method) will be as follows:
Consolidating each subsidiary individually (the direct method)
The opening consolidated statement of financial position of the Entity A group at 1 January 2018 is as
follows:
Entity A
Entity B
Entity C
Adjustments
Consolidated
Millions £
CHF
£
€
£
£
£
Investment in B
80.0
(80.0)
Investment in C
75.0
30.0
(30.0)
Other net assets
220.0
&nbs
p; 125.0
50.0
45.0
30.0
300.0
300.0
200.0
80.0
45.0
30.0
300.0
Share capital
300.0
300.0
Share capital
200.0
80.0
(80.0)
Share capital
45.0
30.0
(30.0)
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The consolidated statement of financial position of the Entity A group at 31 December 2018 is as follows:
Entity A
Entity B
Entity C
Adjustments
Consolidated
Millions £
CHF
£
€
£
£
£
Investment in B
80.0
(80.0)
Investment in C
75.0
25.0
(25.0)
Other net assets
220.0
125.0
41.7
45.0
36.0
297.7
300.0
200.0
66.7
45.0
36.0
297.7
Share capital
300.0
300.0
Share capital
200.0
80.0
(80.0)
Share capital
45.0
30.0
(30.0)
Exchange – B
(13.3)
5.0 (8.3)
Exchange – C
6.0
6.0
300.0
200.0
66.7
45.0
36.0
297.7
The exchange differences in respect of Entity B and Entity C are only shown for illustration purposes; the
consolidated statement of financial position would only show the net amount of £(2.3)m as a separate
component of equity. The exchange difference of £6.0m in respect of Entity C is that arising on the translation
of its opening net assets of €45m into the presentation currency of pound sterling based on the opening and
closing exchange rates of £1=€1.50 and £1=€1.25 respectively, as required by paragraph 39 of IAS 21.
Accordingly, it is this amount of £6.0m that will be reclassified from equity to profit or loss for the year ended
31 December 2019 upon the disposal of Entity C as required by paragraph 48 of IAS 21.
If the consolidated statement of financial position for the Entity A group at 31 December 2018 had been
prepared on the basis of a sub-consolidation of the Entity B sub-group incorporating Entity C, the position
would have been as follows.
Consolidating using a sub-group consolidation (the step-by-step method)
The exchange rates at 1 January 2018 and 31 December 2018 are the equivalent of €1=CHF1.667 and
€1=CHF2.400.
The sub-consolidation of Entity B and Entity C at 31 December 2018 is as follows:
Entity B
Entity C
Adjustments
Consolidated
Millions CHF
€
CHF
CHF CHF
Investment in C
75.0
(75.0)
Other net assets
125.0
45.0
108.0
233.0
200.0
45.0
108.0
233.0
Share capital
200.0
200.0
Share capital
45.0
75.0
(75.0)
Exchange – C
33.0
33.0
200.0
45.0
108.0
233.0
The exchange difference of CHF33.0m in respect of Entity C is that arising on the translation of its opening
net assets of €45m into the functional currency of that of Entity B, the Swiss franc, based on the opening and
closing exchange rates of €1=CHF1.667 and €1=CHF2.400 respectively.
In the consolidated financial statements of the Entity B sub-group for the year ended 31 December 2019, it is
this amount of CHF33.0m that would be reclassified from equity to profit or loss upon the disposal of
Entity C.
The consolidated statement of financial position of the Entity A group at 31 December 2018 prepared using
this sub-consolidation would be as follows:
Foreign
exchange
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Entity A
Entity B
Adjustments Consolidated
sub-group
Millions £
CHF
£
£ £
Investment in B
80.0
(80.0)
Other net assets
220.0
233.0
77.7
297.7
300.0
233.0
77.7
297.7
Share capital
300.0
200.0
Share capital
200.0
80.0
(80.0)
Exchange – C
33.0
11.0
11.0
Exchange – B group
(13.3)
(13.3)
300.0
233.0
77.7
297.7
The exchange differences in respect of Entity C and those for the Entity B sub-group are only shown for
illustration purposes; the consolidated statement of financial position would only show the net amount of
£(2.3)m as a separate component of equity. As can be seen, the consolidated position for the Entity A group
is the same as that using the direct method. However, using the step-by-step method, the exchange difference
of £11.0m in respect of Entity C is the exchange difference of CHF33.0 included in the Entity B sub-
consolidation translated into the presentation currency used in the Entity A consolidated financial statements.
As indicated above, it is this amount of CHF33.0m that would be reclassified from equity to profit or loss
upon the disposal of Entity C in the consolidated financial statements of the Entity B sub-group for the year
ended 31 December 2019. In the consolidated financial statements of the Entity A group for the year ended
31 December 2019, it would be the translated amount of exchange differences of £11.0m that would be
reclassified from equity to profit or loss on the disposal of Entity C.
Although the Interpretations Committee has indicated that the direct method is
conceptually correct, IFRIC 16 permits the use of either approach as an accounting
policy choice (see 6.1.5 above).
In certain situations, the methods of consolidation seem to result in more extreme
differences. For example, consider the disposal of a US subsidiary by a US intermediate
holding company (both of which have the US dollar as their functional currency) within
a group headed by a UK parent (which has sterling as its functional and presentation
currency). The US subsidiary that is disposed of is a foreign operation so exchange
differences accumulated in the separate component of equity relating to it should be
reclassified from equity to profit or loss on its disposal. Under the direct method of
consolidation, this amount will represent exchange differences arising from translating
the results and net
assets of the US subsidiary directly into sterling. However, under the
step-by-step method, these exchange differences will be entirely attributable to the
intermediate parent undertaking and so there would be no reclassification from equity
to profit or loss.
7
CHANGE OF PRESENTATION CURRENCY
IAS 21 does not address how an entity should approach presenting its financial
statements if it changes its presentation currency. This is a situation that is commonly
faced when the reporting entity determines that its functional currency has changed (the
accounting implications of which are set out in IAS 21 and discussed at 5.5 above).
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However, because entities have a free choice of their presentation currency, it can
occur in other situations too.
Changing presentation currency is, in our view, similar to a change in accounting policy,
the requirements for which are set out in IAS 8. Therefore, when an entity chooses to
change its presentation currency, we consider it appropriate to follow the approach in
IAS 8 which requires retrospective application except to the extent that this is
impracticable (see Chapter 3 at 4.4 and 4.7). It will also require the presentation of a
statement of financial position at the beginning of the comparative period (see Chapter 3
at 2.3 and 2.4).
It almost goes without saying that the comparatives should be restated and presented in
the new presentation currency. Further, they should be prepared as if this had always
been the entity’s presentation currency (at least to the extent practicable). The main
issue arising in practice is determining the amount of the different components of
equity, particularly the exchange differences that IAS 21 requires to be accumulated in
a separate component of equity, and how much of those differences relate to each
operation within the group. The following example illustrates the impact of a change in