Exchange differences arising on translation of associates

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pub_acco
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Exchange differences arising on translation of associates

Post by pub_acco »

Translation adjustments arise when a parent translates its foreign associate's financial statements into a presentation currency, and the share of TA is included in the parent's consolidated other comprehensive income. In practice, I see many companies present the TA on associates as "Exchange differences arising on translation of foreign operations", etc. in a statement of comprehensive income rather than as "Share of other comprehensive income of associates and joint ventures". Is there any standard that clearly states that the TA arising from associate's FS should be presented like this? Or, is it just a practice? Or, is it because IAS 1.7 mentions "gains and losses arising from translating the financial statements of a foreign operation" as an item of OCI and "foreign operation" by definition includes associates?
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Re: Exchange differences arising on translation of associates

Post by JRSB »

I guess it depends if the associate had OCI gain or losses itself? https://ifrscommunity.com/knowledge-base/equity-method/
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

I mean, my question is whether TA of a foreign associate should be presented as "Share of OCI of the associate" or as part of the parent's exchange differences arising from foreign operations.... In other words, whether the TA belong to the associate or the parent...?
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Re: Exchange differences arising on translation of associates

Post by Jonny »

Up to now I have never experienced it. Next year by sure. I think it belongs to the parent because the parent is the entity that is converting the financial statement of the associate.
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Re: Exchange differences arising on translation of associates

Post by JRSB »

Can you clarify where the gain/loss arises? So you have your equity accounted associate reporting in foreign currency. Translate the share of loss at average if appropriate, then use that to report share of gain/loss split between PL and OCI as per associate. ?
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

IMO IAS 21 makes it clear that TA on associates is recognised the same way as for consolidated subsidiaries, IAS 21.44:
Paragraphs 45–47, in addition to paragraphs 38–43, apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation or the equity method.
PS and I added this info to the knowledge base
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

JRSB wrote: 15 Nov 2020, 14:17 Can you clarify where the gain/loss arises? So you have your equity accounted associate reporting in foreign currency. Translate the share of loss at average if appropriate, then use that to report share of gain/loss split between PL and OCI as per associate. ?
But apart from those impacts, the value of opening balance of your investment will change due to movements in fx rates, and this will not result from associate's P/L or OCI during the period.

see this illustration for consolidated subsidiaries:
https://ifrscommunity.com/knowledge-bas ... -operation
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Thank you, guys. I would add a few numbers to make the points clear. Assume a foreign associate records the following in its functional currency:

Profit: 100
FVTOCI gain: 50

And assume the above is translated into a parent's presentation currency as follows:

Profit: 120
FVTOCI gain: 60
Exchange differences: 20

When the parent owns 20% of shares in the associate, I observe many companies report the following line items in their statements of comprehensive income:

Share of profit: 24
Exchange differences: 4 (this line also includes those arising from subsidiaries)
Share of OCI: 12

rather than:

Share of profit: 24
Share of OCI: 16

The first presentation is a little bit counter-intuitive to me if I assume the same accounting procedure as consolidation, which means first translating the associate's foreign FS and then applying the equity method to the translated FS. But at the same time, I am aware that the first presentation is dominant in practice, and therefore I am looking for the reason for this.

I was also thinking over the FX impact on the investment but got stuck in there because the investment in an associate is a non-monetary item and may be stated at cost in accordance with IAS 27. IAS 21.32 doesn't directly apply.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

can you add currency to these numbers? you should be able to edit the previous post
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Couldn't edit it.

Profit: €100
FVTOCI gain: €50

Profit: $120
FVTOCI gain: $60
Exchange differences: $20

Share of profit: $24
Exchange differences: $4
Share of OCI: $12

Share of profit: $24
Share of OCI: $16
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

Yeah the time when editing is allowed is limited.
It's not clear to me how those exchange differences of $20 arose in your example, hm?
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Oh, $20 is just a random number that can arise when a EUR financial statement is translated into USD.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

I know that it's an example only, but on what exactly did exchange differences arise. I say that profit of €100 translates to $120 and that's it, where do exchange differences come from in your example?
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

PS. Maybe add at least an exchange rate to your example, it will help to better illustrate the point
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Okay. Then, let’s assume:

Opening net assets: €50 at 1.00
Comprehensive income: €150 at 1.20
Closing net assets: €200 at 1.25

and we will arrive at:

Opening net assets: $50
Comprehensive income: $180
Closing net assets: $250
Exchange differences: $20

We will see the exchange differences of $20 under the OCI part of the associate’s translated statement of comprehensive income. My question is the reason why in practice the $20 is not presented as "Share of OCI of Associates" ;)
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

ok so it's clear now :)

as you can see from you example, exchange differences of $20 have nothing to do with the 'share of OCI of associates', in fact the comrehensive income of €150 can fully result from P/L and the associate can have no OCI items at all
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

But the exchange differences are included in the associate’s translated comprehensive income if we follow the steps specified by IAS 21? The associate should present the following if it presents its separate FS in USD:

Profit: $120
FVTOCI gain: $60
Exchange differences: $20
Total other comprehensive income: $80
Comprehensive income: $200
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

no, it doesn't work that way under IAS 21, have a look at the example in this section:
https://ifrscommunity.com/knowledge-bas ... stment-cta

under your approach, you would never have CTA in consolidated OCI even for subsidiaries
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

IAS 21’s translation procedure is independent from consolidation or the equity method, so if the associate independently presents its FS in USD, we will see the exchange differences in OCI, won’t we? Otherwise, we will see a unknown movement of equity in the changes in equity statement.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

so you're talking about an associate that uses presentation currency that is different from its functional currency and reports CTA in its separate financial statements?
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

No, in my original question. I was trying to say that the IAS 21 procedure doesn’t preclude to recognize the CTA at subsidiary or associate level and therefore IAS 21 might not be the direct reason why many companies present the exchange differences as their own, not as Share of OCI of Associates.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

but these are corner cases...

the most obvious reason is that applying equity method to an associate with different functional currency results in a CTA that is very similar in nature to CTA arising on subsidiaries and that's why both types of CTA are presented together
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Yeah, that is probably one reason.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

... that applies to like 95% of cases? :)
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Another possible reason can be the wording of IAS 1.7 as I pointed out in the original post :)

It's actually not that obvious because it is common in my country to record these exchange differences through Share of OCI of Associates. The nature isn't that obvious either when the foreign associate itself prepares consolidated financial statements and the parent recognizes the share of such consolidated figures using the so-called step-by-step method. In such a case, the associate's consolidated FS often include exchange differences and I don't find a decisive difference between the exchange differences and other OCI items such as cash flow hedges and defined benefit plans.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

well, when I read IAS 1.7 I see a direct link to IAS 21.41...

besides, is there any significance in the distinction that we're discussing? i.e. presenting CTA as a separate OCI line or a part of associate's OCI?
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Yeah, it is important because the exchange differences arising from associates sum to millions of dollars and presentation is always important because our financial statements are published and read by thousands of people ;) We always need a basis for choosing a presentation.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

Yeah you're right, we should aim to be clear about labelling as well.

So to summarise my view:

CTA arising on translation of associate 's data in functional currency that is different than yours should be shown separately as 'your CTA'. And IAS 21 is clear in this respect IMO.

The above should not change if associate presents financial statements using different presentation currency. But in this case you may not be able to obtain the underlying data in functional currency.

If associate consolidates foreign subsidiaries, then I would show their CTA as your share in their OCI, not as your CTA
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Re: Exchange differences arising on translation of associates

Post by pub_acco »

Well, which part of IAS 21 do you mean? I don’t think IAS 21 is clear where in a group we should recognize the CTA. Para 38-43 do not limit the scope to consolidation nor para 44-47 have a specific provision. I think it’s a popular practice to recognize CTA at subsidiary and associate levels as seen in many consolidation textbooks and https://www.cpdbox.com/foreign-currency ... mple-ifrs/

Also, I guess many companies in practice present the exchange differences arising from associate’s foreign subsidiaries as their own, not as share of OCI. I cannot be 100% sure here, but we can usually guess other companies’ practices by looking at the share of OCI that may be recycled. This line can possibly include CTA, FVTOCI debt investments, and deferred hedges, but many global companies present very small numbers in this line, which seems to me like the line does not include CTA because CTA tend to be much larger than the others.
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Re: Exchange differences arising on translation of associates

Post by Marek Muc »

IAS 21.44 explicitly refers to equity method as well, which means that IAS 21.41 applies to equity method too (which, in turn, means that you recognise CTA separately from current year's share of P/L and OCI)

This is also common sense to me: CTA arises mostly on re-translation of opening balance, it has nothing to do with the share of associate's OCI for the period
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