Consolidating foreign currency subsidiaries
However, if consolidated financial statements are prepared where the foreign operation is a subsidiary, such exchange differences are recognised in other comprehensive income and accumulated within equity and are NOT recognised in profit or loss when the parent disposes of the net investment.
The term ‘presentation currency’ is the currency in which the financial statements are presented.
If, say, 80% of a group’s profit is generated by European subsidiaries whose functional currency is the Euro, (despite the fact that the group has other functional currencies such as US Dollars and Canadian Dollars), it may adopt the Euro as its presentation currency for the purpose of consolidated financial statements.
Assets and liabilities for each statement of financial position presented (which must also include the comparatives) should be translated from the functional currency to the presentation currency at the closing exchange rate at the reporting date.Reporting entities could have a monetary item that is receivable from, or payable to, a foreign operation.If the settlement of such amounts is not planned or likely to occur in the foreseeable future, such transactions will form part of an entity’s net investment in that foreign operation.The invoice will be translated into sterling at the exchange rate prevailing at the date of the transaction, i.e.£124,138 (€180,000 ÷ 1.45) and this is the amount that will be recorded in the supplier’s purchase ledger.