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Consolidation of Foreign sub

3 October 2010 5,655 views 5 Comments

Hi there, Can anyone advise how to treat intercompany loans during the consolidation of a foreign sub under ifrs?
I am trying to calculate the fx gain/loss that goes to equity on translation of the subs net assets but I’m unsure what adjustments I should post before I do this. For example should I eliminate interco loans and make the FV adjustments before or after I calculate the gain/loss ?
I think this will make quite a difference as the interco loans are large!
Also when we acquired the sub it was a …

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5 Comments »

  • ifrslist
    ifrslist said:

    Consolidation of Foreign sub – http://www.ifrslist.com/2010/10/consolid...
    via Twitoaster

  • Mladek said:

    If the loan payable (sub) is denominated in a different currency than the parent’s functional (group’s presentation), the company has to recognize a forex difference.

    IAS 21.45 “an intragroup monetary asset (or liability), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements.”

    So, 1st, remeasure the loan payable (sub) per IAS 21.39.a. 2nd, eliminate the remeasured loan payable against the loan receivable (parent) per IAS 27.20. 3rd, take the resulting forex adjustment to comp. inc. per IAS 21.39.c.

    BTW, if you don’t want to recognize big forex adjustments, don’t make big foreign currency loans.

    As to eliminating the investmnet.

    The past bargain purchase was a past event, which established the measurement basis for the sub’s net assets in the past.

    Once that basis has been established (as long as it was established properly), how the sub was purchased in no longer, in the present, relevant.

    In the present, if the sub’s net assets are > 0, it has to have capital (which is = to net assets). If the acquisition was recognized properly, the parent’s investment in sub = the sub’s capital. So, I don’t see the problem (unless the acquisition wasn’t recognized properly, I which case it has to be revisited).

  • riyer0018 said:

    Mladek is correct w.r.t. translation of inter-co loan before knocking off the inter-co receivable with the payable. However, the exchange fluctuation can be taken to Other Comprehensive income only if the loan was in substance a part of net investment in subsidiary (Refer IAS 21.28 and 21.32).

    Further, w.r.t. consolidation the difference between investments and net assets of subsidiary should be given in opening reserves [Past results with initial bargain purchase gain subsumed in it].

    Please note that the for the purpose of consolidation, the sub will prepare accounts assuming

    (a) fair value of net assets as at the acquisition date will be considered as the deemed cost.These will be adjusted for future transactions.

    (b) you will have to recompute depreciation/gains/losses etc (Since the deemed cost of net assets change)

  • vengenerator (author) said:

    Thank you both Mladek and riyer!

    Based on your comments here’s an illustration of what I plan to do:

    Parent:
    Net assets of £5000k
    including intercompany payable of €100k (say £100k)

    Sub:
    Net assets of $100k
    including intercompany debtor of €150k (say £100k)

    Since the interco debtor in the sub is not part of a net investment I will take the gain to the subs P&L which will then feed into the consolidated P&L.

    I will translate the subs net assets at the closing rate, P&L at avg rate and pre acq reserves at acq rate. The difference to make all this balance will go to equity via OCI as the translation adjustment. I will then cancel the interco loans and precced with other consolidation adjustments i.e. the cancellation of the investment with the subs share capital.

    Many thanks for your reponses!
    V

  • riyer0018 said:

    Go ahead V.

    Just ensure that the revised historical cost as on the date of acquisition for assets and liabilities (of the Sub) that are not carried at fair value= fair value at the acquisition date. Consequently, you may have to recompute depreciation/gains/losses etc.

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