Page 40 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

At the reporting date, monetary balances are retranslated at the closing rate (i.e. the rate in force
at the reporting date) with any foreign exchange gain/loss being charged to profits.

Non‐monetary items are not retranslated and will remain at their historic rate. This will be the
rate from when the item was originally acquired if it is measured at historic cost or in the case of
the item being revalued, the rate from the date of the revaluation.

Application to Menta – foreign currency transactions
Menta (and any of its subsidiary companies) may enter into individual transactions denominated
in foreign currency. If this occurs, the transaction would be 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, Menta purchases fuel in bulk from one source to supply depots in all
locations and countries.

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

Menta has numerous foreign subsidiaries as the SOP&L and OCI discloses a retranslation gain for
the year of C$11.8m for 2017 (C$9.3m in 2016). Within equity in the SOFP there is a net
cumulative retranslation reserve of C$84.5m (C$72.7m in 2016). This is all attributable to the
controlling group as there is no non‐controlling interest disclosed in Menta’s financial statements.
The increase in the retranslation reserve for the year will have the effect of increasing C$ value of
the individual net assets (including goodwill) of foreign subsidiaries within the consolidated SOFP.

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

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