ACCT6010 Class 12 Foreign Currency Illustration – Intra-Group Transactions
On 1 July 20X7 Ausco Ltd is an Australian company and it provided an interest-free loan of (AUD) $100,000 to its foreign subsidiary, Forco Ltd. Forco Ltd’s functional currency is FC. This loan is viewed as part of the Ausco Ltd’s net investment in Forco Ltd. Exchange rates are as follows:
1/7/20X7 AUD 1 = FC2 30/6/X8 AUD 1 = FC2.5
a) Record the loan in the books of Ausco Ltd: Dr Loan to Sub
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b) What entry, if any, would be necessary in relation to the loan in the books of Ausco Ltd at 30 June 20X8? Give reasons for your answer.
No entry is required. The loan is in AUD $ and Ausco’s accounting records are in AUD, Ausco’s functional currency and presentation currency.
No foreign currency gain or loss can arise because it is not a foreign currency transaction.
c) Assume that instead of lending in AUD, Ausco Ltd made an interest-free loan of FC200,000 to Forco Ltd on 1/7/20X7. Record the loan in the books of Ausco Ltd: Dr Loan to Sub $100,000
The amount is recorded in AUD at the rate applicable at the date of the transaction.
d) What entry, if any, would be necessary in relation to the loan in the books of Ausco Ltd at 30 June 20X8? Give reasons for your answer.
Dr Foreign currency loss $20,000 Cr Loan to Sub
The loan receivable is translated at the closing rate at the end of the reporting period and the foreign currency gain or loss is recognised in profit or loss.
FC 200,000 / 2.5 = AUD 80,000; Loan is reduced by AUD 20,000 and a foreign currency loss of AUD 20,000 is recognised.
e) How will the treatment of any foreign currency gain or loss in relation to the loan differ between the separate financial statements of Ausco Ltd and the consolidated financial statements of the Ausco Group?
In the separate financial statements of Ausco Ltd the foreign currency loss is recognised in profit or loss. In preparing the consolidated financial statements the foreign currency loss is transferred to the foreign currency translation reserve because the loan is part of the net investment in a foreign operation that has a different functional currency (whose financial statements are therefore translated using the current rate method). Refer AASB 121. 32-33.
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