Question 1

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: Where should the exchange differences arising on the translation of Velocity Trans's net assets be recognized in Quantum's consolidated financial statements?

Accepted Answer

Recall the IAS 21 treatment for translation differences of a foreign operation. Because these are unrealized paper differences, they do not hit the P&L.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Recognizing the translation difference in Profit or Loss, confusing it with the settlement of a foreign currency trade receivable/payable.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 3

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