Exchange rate adopted by subsidiary is differed from group exchange rate in group consolidation?

Question

In group consolidation, group exchange rates are adopted to convert foreign subsidiares assets, liabilities and P&L. Problem arise when subsidiaries which need to follow a goverenment deternmined exchange rate (E.g. Thailand needs to follow the Bank of Thailand exchange rate). Exchange difference arise in elimination of intra-group receivable and payable. Can anyone advise what is the generally accepted international accounting treatment for the above? Say for example, a parent company and a subsidiary has HKD and THB respectively as its functional currency. And the group presentation currency is also in HKD. There is USD1m intercompany payable from the subsidiary. The parent company booked the receivable using the group USD to THB rate of 30.00 whereas the subsidiary booked the payable using Bank of Thailand rate of 34.00. So, how are we going to deal with such exchange difference?

Answer 1

1st, if the parent co.'s functional currency is HKD and the group's presentation currency is also HKD, the USD1m loan would have been recorded in HKD in the parent's books cos that's its functional currency. In the parent's books, the THB rate is irrelevant.
2nd, you should be guided by IAS 21 The Effects of Changes in Foreign Exchange Rates.

The Thai sub. has THB as its functional currency and has to translate its whole set of financial statements to the group presentation currency, HKD. The foll. paras are relevant to the Thai sub.:

Translation to the Presentation Currency
38. An entity may present its financial statements in any currency. If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented.
39. The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:
(a) assets and liabilities for each balance sheet presented (i.e. including comparatives) shall be translated at the closing rate at the date of that balance sheet;
(b) income and expenses for each income statement (i.e. including comparatives) shall be translated at exchange rates at the dates of the transactions; and
(c) all resulting exchange differences shall be recognised as a separate component of equity (what this means is the exchange differences should go to a Currency Translation Reserve in the Statement of Changes in Equity)
After you've done the above, your Thai sub. financial statements will be presented in HKD. If the interco. loan, now in HKD, still does not match the parent co.'s amt, the foll. paras are relevant to the parent co.:

15. An entity may have a monetary item that is receivable from or payable to a foreign operation (Foreign operation: A subsidiary, associate, joint venture, or branch whose activities are based in a country other than that of the reporting enterprise.) An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation, and is accounted for in accordance with paragraphs 32 and 33. Such monetary items may include long-term receivables or loans. (They do not include current a/c balances arising from normal trading.)

32. Exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in a separate component of equity; they will be recognised in profit or loss (only) on disposal of the net investment.

So, as you can see, whatever exchange diff. there are will be taken to a separate component of equity. Your Currency Translation Reserve (or similar name) will be a separate column in your Statement of Changes in Equity if you use a columnar format.

Answer 2

Yes I agree that the exchange rate for life is not fair. Life has a monetary value according to many governments of about US$4m. The currency in my opinion is experiences as the more of those you have the richer your life is. This said the currency is not fair as it depends on circumstances, resources and luck. Most of us have choice though :)