International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 231
presentation currency of a relatively simple group.
Example 15.20: Change of presentation currency
A Canadian parent, P, was established on 1 January 2017 and issued new shares for C$20 million. On the
same date it established two wholly owned subsidiaries, S1 and S2 incorporated in Canada and the UK
respectively and subscribed C$10 million and £4.5 million for their entire share capital. The functional
currency of each group company was determined to be its local currency, i.e. Canadian dollars for P and S1
and the pound sterling for S2.
During 2017, S1 made a profit of C$800,000, S2 made a profit of £350,000 and P made a loss of C$25,000.
On 30 September 2017, P issued new shares for C$10 million of which £4 million was used immediately to
subscribe for additional shares in S2.
During 2018, S1 made a profit of C$700,000, S2 made a profit of £750,000 and P made a loss of C$30,000
before dividends received from S2. On 30 June 2018, S2 paid dividends (out of profits then made) of
£700,000 to P and on 30 September 2018 P paid dividends of C$1,000,000 to its shareholders.
The relevant exchange rates for C$1=£ were as follows:
1 January 2017
2.10
30 September 2017
2.28
31 December 2017
2.35
Average for 2017
2.24
30 June 2018
2.55
30 September 2018
2.63
31 December 2018
2.40
Average for 2018
2.52
Foreign
exchange
1165
Consequently, the statement of changes in equity in P’s consolidated financial statements for 2017 and 2018
can be summarised as follows:
Paid-in
Retained
Foreign
capital
earnings
exchange
Total
C$
C$
C$
C$
1 January 2017
–
–
–
–
Issue of shares
30,000,000
–
–
30,000,000
Comprehensive income
–
1,559,000
1,443,500
3,002,500
31 December 2017
30,000,000
1,559,000
1,443,500
33,002,500
Comprehensive income
–
2,560,000
457,500
3,017,500
Dividends
–
(1,000,000)
–
(1,000,000)
31 December 2018
30,000,000
3,119,000
1,901,000
35,020,000
The comprehensive income reflected within retained earnings represents the profit for each year, calculated
as follows:
2017: C$800,000 + (£350,000 × 2.24) – C$25,000 = C$1,559,000
2018: C$700,000 + (£750,000 × 2.52) – C$30,000 = C$2,560,000
The foreign exchange differences recognised in other comprehensive income, which are entirely attributable
to S2, can be calculated as follows:
2017
2018
£
Rate
C$
£
Rate
C$
Opening net assets*
4,500,000
2.10
9,450,000
8,850,000
2.35 20,797,500
2.35
10,575,000
2.40
21,240,000
Exchange gain
1,125,000
442,500
Additional capital
4,000,000
2.28
9,120,000
–
– –
2.35
9,400,000
–
–
Exchange gain
280,000
–
Dividend
–
–
–
(700,000)
2.55 (1,785,000)
–
–
2.40 (1,680,000)
Exchange gain
–
105,000
Profit 350,000
2.24
784,000
750,000
2.52
1,890,000
2.35
822,500
2.40
1,800,000
Exchange gain/(loss)
38,500
(90,000)
8,850,000
1,443,500
8,900,000
457,500
*for 2017, includes the proceeds received for issuing shares on 1 January.
For the year ended 31 December 2019, P decided to change its presentation currency to sterling. (This may
or may not have coincided with a change of P’s functional currency.) In P’s consolidated financial statements
for the year ended 31 December 2019, what amounts should be included in respect of the comparative period?
1166 Chapter 15
Direct method
If P’s accounting policy was to use the direct method of consolidation (see 6.1.5 above), its financial
statements for 2017 and 2018 would have been prepared by translating the financial statements of each
entity within the group directly into sterling (where necessary). The revised statement of changes in
equity in P’s consolidated financial statements can be summarised as follows and these are the amounts
that will be reflected as comparative amounts in P’s consolidated financial statements for the year ended
31 December 2019:
Paid-in
Retained
Foreign
capital
earnings
exchange
Total
£
£
£
£
1 January 2017
–
–
–
–
Issue of shares
13,909,775
–
–
13,909,775
Comprehensive income
–
695,982
(562,140)
133,842
31 December 2017
13,909,775
695,982
(562,140)
14,043,617
Comprehensive income
–
1,015,873
(87,595)
928,278
Dividends
–
(380,228)
–
(380,228)
31 December 2018
13,909,775
1,331,627
(649,735)
14,591,667
The table above assumes that P will record its paid-in capital at historical exchange rates (£13,909,775 =
C$20,000,000 ÷ 2.10 + C$10,000,000 ÷ 2.28). Alternatively, P could retranslate those amounts at year end
rates although any difference arising would simply be recorded in another component of equity (but not the
foreign exchange reserve) and this difference would not affect profit or loss or other comprehensive income
in any period (see 6.2.1 and 6.2.2 above).
The calculations showing how these amounts have been determined are shown below.
The comprehensive income reflected within retained earnings represents the profit for each year, calculated
as follows:
2017: (C$800
,000 ÷ 2.24) + £350,000 – (C$25,000 ÷ 2.24) = £695,982
2018: (C$700,000 ÷ 2.52) + £750,000 – (C$30,000 ÷ 2.52) = £1,015,873
In this case, the profit calculated in this way results in the same amount as translating the consolidated profit
of C$1,559,000 and C$2,560,000 presented in Canadian dollars at the average rate for the period of
C$2.24=£1 and C$2.52=£1 respectively. In practice minor differences can arise as a result of imperfections
in the average rates used.
Similarly, the net assets presented above are the same as the amounts obtained by translating consolidated net
assets of C$33,002,500 and C$35,020,000 at the closing rates at the end of the relevant period, C$2.35=£1
and C$2.40=£1 respectively. This should always be the case.
However, the foreign exchange reserve is fundamentally different to that in the financial statements presented
in Canadian dollars. In this case it represents exchange differences arising from the translation of both P’s
and S1’s financial statements into sterling whereas previously it represented exchange differences arising
from the translation of S2’s financial statements into Canadian dollars.
Foreign
exchange
1167
The foreign exchange differences recognised in other comprehensive income that are attributable to P can be
calculated as follows:
2017
2018
C$
Rate
£
C$
Rate
£
Opening net assets*
550,000 2.10
261,905
1,405,000 2.35
597,872
2.35
234,042
2.40
585,417
Exchange loss
(27,863)
(12,455)
Additional capital**
880,000 2.28
385,965
– –
–
2.35
374,468
–
–
Exchange loss
(11,497)
–
Dividend received
– –
–
1,785,000
2.55 700,000
–
–
2.40
743,750
Exchange gain
–
43,750
Dividend paid
– –
–
(1,000,000)
2.63 (380,228)
–
–
2.40
(416,667)
Exchange loss
–
(36,439)
Loss
(25,000) 2.24
(11,161)
(30,000) 2.52
(11,905)
2.35
(10,638)
2.40
(12,500)
Exchange gain/(loss)
523
(595)
1,405,000
(38,837)
2,160,000
(5,739)
*for 2017, includes the proceeds received for issuing shares on 1 January (C$20,000,000) less amounts
invested in S1 (C$10,000,000) and S2 (C$9,450,000 = £4,500,000 × 2.10) on the same date.
**reduced by the amounts invested in S2 on the same date.
The foreign exchange differences recognised in other comprehensive income that are attributable to S1 can
be calculated as follows:
2017
2018
C$
Rate
£
C$
Rate
£
Opening net assets*
10,000,000
2.10 4,761,905
10,800,000 2.35 4,595,745
2.35 4,255,319
2.40 4,500,000
Exchange loss
(506,586)
(95,745)
Profit
800,000
2.24 357,143
700,000
2.52 277,778
2.35 340,426
2.40 291,667
Exchange (loss)/gain
(16,717)
13,889
10,800,000
(523,303) 11,500,000
(81,856)
* for 2017, includes the proceeds received for issuing shares on 1 January.
Therefore the total foreign exchange loss arising in 2017 is £562,140 (£38,837 + £523,303) and in 2018 is
£87,595 (£5,739 + £81,856).
Under this method amounts in the foreign exchange reserve would be reclassified to profit or loss on the
subsequent disposal of S1, but not on the subsequent disposal of S2.
1168 Chapter 15
Step-by-step method
If P’s accounting policy was to use the step-by-step method of consolidation (see 6.1.5 above), the first step
in producing its consolidated financial statements for 2017 and 2018 would have been to translate the financial
statements of S2 into Canadian dollars, the functional currency of P, to produce consolidated financial
statements in Canadian dollars (effectively those that P had prepared historically). The second step involves
translating these consolidated financial statements into sterling.
These financial statements (and hence the comparative amounts included in the financial statements for the
year ended 31 December 2019) will appear to be the same as those produced under the direct method
(assuming equity items are dealt with similarly, i.e. paid-in capital is translated at the relevant rate at the date
of issue and that retained earnings represent each element translated at the relevant rates, being 2017 and
2018 profit at the average rate for the year, and dividends at the date of payment). However, the balance on
the foreign exchange reserve will be attributable to different entities within the group (see 6.6.3 above). The
calculations showing how these amounts have been determined are shown below.
The foreign exchange differences recognised in other comprehensive income in the financial statements
presented in Canadian dollars that are attributable to S2 will remain attributable to S2, albeit that they are
translated into sterling at the average rate:
2017: C$1,443,500 ÷ 2.24 = £644,420
2018: C$457,500 ÷ 2.52 = £181,548
The remaining exchange differences recognised in other comprehensive income, which arise from
retranslating P’s consolidated financial statements presented in Canadian dollars into sterling, are attributable
to P. They can be calculated as follows:
2017
2018
C$
Rate
£
C$
Rate
£
Opening net assets*
20,000,000
2.10
9,523,809
33,002,500
2.35 14,043,617
2.35
8,510,638
2.40
13,751,042
Exchange loss
(1,013,171)
(292,575)
Additional capital
10,000,000
2.28
4,385,965
–
2.35
4,255,319
Exchange loss
(130,646)
–
Dividend paid
–
2.24
–
(1,000,000)
2.63 (380,228)
2.35
–
2.40 (416,667)
Exchange loss
–
(36,439)
Comprehensive 3,002,500
2.24
1,340,402
3,017,500
2.52 1,197,421
income
2.35
1,277,660
2.40
1,257,292
Exchange (loss)/gain
(62,742)
59,871
33,002,500
(1,206,559)
35,020,000
(269,143)
* for 2017, includes the proceeds received for issuing shares on 1 January.
In contrast to the direct method, under this method amounts in the foreign exchange reserve would be
reclassified to profit or loss on the subsequent disposal of S2, but not on the subsequent disposal of S1.
In the example above, it was reasonably straightforward to recreate the consolidated equity
balances and identify the amounts of accumulated exchange differences related to each
entity within the group using the new presentation currency. This is because the group had