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For example, let’s say that the German company was established on 10 September 2010 with the share capital of EUR 100 000.Then, on 3 January 2015, the German company was acquired by the UK company.You would need to translate them using the closing rate, isn’t it?Therefore, their amount would be EUR 4 500 (German cost of sales) * 0,8562 (closing rate) = 3 853.If not, then apply the average rates for the period. Here, IAS 21 is silent again, but in my opinion, the most appropriate seems to apply the rate ruling at the transaction date. So, let’s say the German subsidiary sold the goods to the UK parent on 30 November 2016 for EUR 5 000.They remain unsold in the UK warehouse at the year-end.The relevant exchange rates: At the date of transaction, German subsidiary recorded the payable at EUR 11 730 (10 000/0,8525).
The profit shown in German books is the unrealized profit for the group (as the goods are unsold from the group’s perspective).It’s true that the standard IAS 21 is silent on this matter. Some time ago, the exposure draft proposed to translate the equity items at the closing rate, but it was not included in the standard. It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included.It means that in most cases, companies decide whether they apply closing rate or historical rate. In my own past practice, I’ve seen both cases – closing rates and historical rates, too. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Let me describe what’s the most appropriate in my opinion, but please remember, that it results from the practice and common sense, not from the rules (as there are none).You can eliminate it with the UK parent’s receivable of GBP 10 000. Instead, the UK parent provided a loan to the German subsidiary of GBP 10 000.However, there will still be exchange rate gain of EUR 50 reported in the subsidiary’s profit or loss. Let’s say that the settlement of the loan is not likely to occur in the foreseeable future and therefore, the loan is a part of the net investment in a foreign operation.
Therefore, the share capital amounts to GBP 78 000, rather than GBP 82 340.