Foreign transactions and foreign subsidiaries - part 1

In this lesson

1. 0:00 IAS 21: Foreign currency translation overview
2. 1:27 Functional and presentation currencies explained
3. 3:51 Statement of financial position translation method
4. 5:00 Goodwill, NCI and post-acquisition profit translation
5. 7:11 Example 1: Calculating goodwill at closing rate
6. 11:26 Example 1: Noncontrolling interest calculation
7. 13:29 Example 1: Group share of subsidiary profits
8. 14:51 Statement of profit and loss translation approach
9. 16:34 Example 2: Intra-group transactions and cost of sales

About this lesson

You'll discover why IAS 21 requires the closing rate method for the statement of financial position and the average rate for profit and loss, and how to handle the additional calculations (goodwill, non-controlling interest, and post-acquisition profits) that arise when currencies are involved. The lesson covers the essential distinction between functional currency (the currency a subsidiary operates in day-to-day) and presentation currency (the currency used for group financial statements). You'll work through a detailed consolidation example involving an 80% subsidiary, learning how to calculate goodwill and non-controlling interest in the original foreign currency, then translate them at the closing rate. The same approach applies to the group's share of post-acquisition profits, which must also be translated before inclusion in group reserves. You'll also see how the closing rate method applies differently to the profit and loss statement, where items are translated at the average rate for the year rather than the closing rate. The lesson explains the logic behind this approach and demonstrates how to handle intra-group transactions (like inter-company sales) within a foreign subsidiary context. Any exchange gains or losses arising from the translation process are recognised in reserves through other comprehensive income, rather than affecting profit for the period. By the end, you'll have a clear methodology for tackling foreign subsidiary consolidations in your F2 exam, combining standard consolidation techniques with the currency translation rules that IAS 21 requires.

Duration: 18m