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Preparation of Consolidated Financial StatementsIAS 21Foreign ExchangeConsolidationSection B

ACCA · Question 29 · Preparation of Consolidated Financial Statements

SECTION B

CASE SCENARIO: Quantum Logistics Group acquired 100% of the equity of a foreign subsidiary, Velocity Trans, on 1 January 20X9. Quantum paid $5,000,000 in cash and agreed to pay further contingent consideration in two years. The present value of this contingent consideration at acquisition was $1,000,000. At acquisition, Velocity Trans had an internally generated brand not recognized in its financial statements, with an estimated fair value of $2,000,000. The applicable tax rate is 20%. Velocity Trans is currently defending a legal claim from a customer. Quantum's legal team estimates a 60% probability of losing and paying $3,000,000, and a 40% probability of losing and paying $1,000,000. Velocity Trans's functional currency is the Dinar, while Quantum's is the Dollar.

QUESTION: When translating Velocity Trans's financial statements into Dollars at the year-end, which exchange rate should be used to translate its net assets (assets and liabilities)?

Answer options:

A.

The historical rate at the date of acquisition.

B.

The average rate for the year.

C.

The closing rate at the reporting date.

D.

A weighted average of the historical and closing rates.

How to approach this question

Recall the IAS 21 rules for translating a foreign operation: Assets/Liabilities at closing rate, Income/Expenses at average rate.

Full Answer

C.The closing rate at the reporting date.✓ Correct
Under IAS 21 The Effects of Changes in Foreign Exchange Rates, when translating the financial statements of a foreign operation into a presentation currency, all assets and liabilities must be translated at the closing rate at the date of the statement of financial position.

Common mistakes

Confusing the translation rules for a foreign operation with the rules for individual foreign currency transactions.
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