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Practical caseIAS 21L3 · Advanced

Loan to a US subsidiary: net investment, intragroup balance, separate or consolidated treatment and tax

4 documents12 tasks≈ 85 min
0 / 14 items completed
Standards
IAS 21 — The Effects of Changes in Foreign Exchange Rates
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Groupe Solenne SA (fictitious entity), whose functional and presentation currency is the euro, holds all of Atlantic Gear Inc. (fictitious entity), a US company whose functional currency is the US dollar (USD). The parent granted it a loan in dollars and invoices it for services that feed a current account in dollars. For the closing of 31 December 20X5, the consolidation team must determine the treatment of the exchange differences on these two balances in the parent's separate statements and in the consolidated statements.

Your assignment

Assess, for each of the two balances, whether it forms part of the net investment; compute the exchange difference on the loan and record it in the parent's separate statements; compute the difference on the current account and record it; post the consolidation entry on the net investment difference; compute the tax effect and record it; check the roll-forward of the translation reserve; present the effect on the consolidated financial statements; conclude.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

4 documents: open each one to read it.

Document 1Contract

Loan agreement and board minutes

Loan agreement of 1 January 20X5 and board minutes: loan of 1,000,000 USD granted to Atlantic Gear Inc., denominated in dollars, interest-free (case assumption). The parent's board decided to plan no repayment and considers that no repayment is likely in the foreseeable future. Carrying amount of the loan in the parent's books at the rate of 1 January 20X5 of 0.90: 900,000 EUR. At the closing rate of 0.95: 950,000 EUR (translated amounts given by the case).

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Loan in dollars$1,000,000.00
Carrying amount of the loan before the difference€900,000.00
Loan translated at the closing rate€950,000.00
Current account in dollars$300,000.00
Carrying amount of the current account before the difference€270,000.00
Current account translated at the closing rate€285,000.00
Tax rate given by the case (in %)25%
Opening translation reserve€120,000.00
Translation difference of the year on net assets€80,000.00
Translation reserve expected (check)€237,500.00
Audit fees€12,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort4

  • Loan agreement and board minutes

  • Intragroup current account

  • Consolidation data

  • Audit fees

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      12 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        For each balance, what treatment applies in the parent's separate statements and in the consolidated statements?

      2. Task 2Professional judgement

        Does the loan form part of the net investment? And the current account? Justify.

      3. Task 3Calculation

        Compute the exchange difference on the loan.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the exchange difference on the loan.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Journal entries

        Record the loan difference in the parent's separate statements.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      5. Task 5Calculation

        Compute the exchange difference on the current account.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the exchange difference on the current account.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      6. Task 6Journal entries

        Record the current account difference.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      7. Task 7Journal entries

        Post the consolidation entry on the loan difference.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      8. Task 8Calculation

        Compute the tax effect of the difference taken to other comprehensive income.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the tax effect of the difference taken to other comprehensive income.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Journal entries

        Record the tax effect.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      10. Task 10Calculation

        Check the roll-forward of the translation reserve.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Check the roll-forward of the translation reserve.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Effects on the financial statements

        What is the cumulative effect of the four entries in the parent's accounts and the consolidation worksheet, before elimination of the intragroup loan and current account?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      12. Task 12Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 14).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 21 §15
      • IAS 21 §32
      • IAS 21 §33
      • IAS 21 §41
      • IAS 21 §44
      • IAS 21 §45
      • IAS 21 §46
      • IAS 21 §50