Page 37 - MCS August Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

translated at the rate ruling at the date of the transaction. Any subsequent exchange gain or loss
on settlement would be recorded as an item of other income or expense in arriving at profit
before tax within the SP&L. This could be the case if, for example, Montel purchases materials or
components from one source to supply manufacturing plants in a number of locations and
countries.

This issue would also apply to any intra‐group transactions (inventory or management charges)
from Montel to any subsidiaries located in a different country.

Requirements of IAS 21 re foreign operations
When a subsidiary has a different functional currency to that of the parent entity, the subsidiary
will be classed as a foreign operation.

In order to consolidate a foreign operation, the assets and liabilities will be translated using the
“closing rate” i.e. the rate in force at the reporting date. Goodwill arising on the acquisition of the
subsidiary will also be translated at the closing rate. Items of income or expense are translated at
the average rate for the year.

Foreign exchange gains or losses will arise on the retranslation of the net assets each year along
with the retranslation of goodwill. The gains/losses are recognised in other comprehensive
income and are split between the parent and non‐controlling interest shareholders of the
subsidiary.

Application to Montel – foreign operations
Montel’s functional currency is F$. Any transactions in a different currency will therefore be
classed as foreign currency transactions. The consolidated financial statements are presented in
F$. If a subsidiary has been acquired which has a different functional currency, it will be being
treated as a foreign operation.

Although the available information refers to Montel being a multinational camera manufacturer
and extracts of consolidated financial statements have been provided, there is no disclosure of
exchange differences arising on retranslation of a subsidiary’s net assets, and nor is there any
disclosure of non‐controlling interests. It could be that all subsidiaries are wholly‐owned and are
based in Farland.

IFRS 5 Assets held for sale and discontinued operations

IFRS 5 requires that an asset (or group of assets) is classified as ‘held for sale’ if it meets specified
criteria, including there is an immediate commitment to sell the asset in its current condition at a
realistic price. If an asset meets this definition, it should be reclassified as a current asset and
subject to an impairment review where recoverable amount is based upon fair value less selling
costs (value in use is not relevant as the entity has a commitment to sell the asset). From the date
of classification as held for sale, the asset will no longer be subject to depreciation and it can
continue to be used in the business until disposal.

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