ACCOUNTING FOR BUSINESS COMBINATIONS
Translation of Financial Statements of a Foreign Subsidiary
PAS 21 — The Effects of Changes in Foreign Exchange Rates
Translation from the Functional Currency to the Presentation Currency
The results and financial position of an entity whose functional currency is not the currency of a
hyperinflationary economy are translated into a different presentation currency using the following
procedures: [PAS 21.39]
● assets and liabilities for each balance sheet presented are translated at the closing rate at the date
of that balance sheet. This would include any goodwill arising on the acquisition of a foreign
operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on
the acquisition of that foreign operation are treated as part of the assets and liabilities of the
foreign operation [PAS 21.47];
● income and expenses for each income statement are translated at exchange rates at the dates of
the transactions; and
● all resulting exchange differences are recognised in other comprehensive income.
ASSETS & LIABILITIES
CURRENT/CLOSING
EQUITY ACCOUNTS:
SHARE CAPITAL & APIC
HISTORICAL/DATE OF ISS.
RETAINED EARNINGS:
RE, BEG.
TRANS. RE-PY/HISTORICAL
PROFIT/LOSS (REVENUES & EXPENSES) DATE OF TRANS. /AVERAGE
DIVIDENDS
DATE OF DECLARATION
DEBIT CREDIT
ASSETS
LIABILITIES
SC & APIC
RE
TOTAL
TRANSLATION ADJ.-DEBIT
TOTAL
10M
3.5M
6.0M
1.2M
10M
10.7M
0.7M
10.7M 10.7M
CUMMULATIVE
CUM. TRANS. ADJ., BEG. – EQUITY
TRANS. ADJ.-CY – OCI
CUM. TRANS. ADJ., END – EQUITY
800,000 - DEBIT
100,000 - CREDIT
700,000 - DEBIT
Special rules apply for translating the results and financial position of an entity whose functional currency
is the currency of a hyperinflationary economy into a different presentation currency. [PAS 21.42-43]
Where the foreign entity reports in the currency of a hyperinflationary economy, the financial statements
of the foreign entity should be restated as required by PAS 29 Financial Reporting in Hyperinflationary
Economies, before translation into the reporting currency. [PAS 21.36]
ILLUSTRATIVE PROBLEM 1:
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On January 3, 2020, Pilipino Company acquired a 100% interest in the common stock of Arigato
Company, a Japanese firm, when Arigato’s shareholders’ equity was:
Common stock
200,000 yen
Retained earnings
400,000 yen
On December 31, 2020, Arigato’s trial balance was:
DEBIT
Cash
¥ 40,000
Accounts receivable
120,000
Inventory
100,000
Plant and equipment
700,000
Accumulated depreciation
CREDIT
¥ 240,000
Accounts payable
80,000
Common stock
200,000
Retained earnings
400,000
Sales
600,000
Cost of sales
360,000
Operating expenses
140,000
Depreciation
TOTAL
60,000
.
¥ 1,520,000
¥ 1,520,000
Exchange rates were:
January 3, 2020
December 31, 2020
Average for 2020
P1 = ¥2.2727
P1 = ¥2.5000
P1 = ¥2.3529
Revenues and expenses were incurred evenly during 2020.
Required: Prepare a schedule translating the December 31, 2020 trial balance from Japanese yen to
Philippine pesos.
ILLUSTRATIVE PROBLEM 2:
On January 1, 2020, Davao Company organized Durian Company as a subsidiary in Thailand with an
initial investment cost of 60,000 Baht. Durian Company’s December 31, 2020 trial balance in Thailand
baht is as follows:
2
DEBIT
CREDIT
Thailand Baht
Cash
7,000
Accounts receivable (net)
Receivable from Davao Company
Inventory
Plant and equipment
20,000
5,000
25,000
100,000
Accumulated depreciation
10,000
Accounts payable
12,000
Bonds payable
50,000
Common stock
60,000
Sales
150,000
Cost of goods sold
70,000
Depreciation expense
10,000
Operating expenses
30,000
Dividends paid
15,000
.
282,000
282,000
TOTAL
Additional information:
1. The receivable from Davao is denominated in Thailand baht. Davao’s books show a P4,000
payable to Durian.
2. Purchases of inventory goods are made evenly during the year. Items in the ending inventory
were purchased November 1.
3. Equipment is depreciated using straight-line method with a 10-year life and no residual value. A
full year’s depreciation is taken in the year of acquisition. The equipment was acquired on March
1, 2020.
4. The dividends were declared and paid on November 1.
5. Exchange rates were as follows:
January 1, 2020
1 baht = P 1.46
March 1, 2020
1 baht = P 1.48
3
November 1, 2020
1 baht = P 1.54
December 31, 2020
1 baht = P 1.60
2020 average
1 baht = P 1.50
Required:
1. Prepare a schedule translating the December 31, 2020 trial balance from Thailand baht to pesos.
2. Prepare a proof of the translation adjustment.
EXERCISES
PROBLEM 1
The following data were taken from the trial balance on December 31,2020 of Foreign Co., a
subsidiary of Manila Co.
Total Assets
21,750
Total Liabilities
11,500
Shareholders’ Equity:
Ordinary shares
5,000
Retained earnings (1/1/ 2020)
2,500
Sales
90,000
Cost of goods sold
80,000
Depreciation expense
1,500
Other operating expenses
5,750
Additional Information:
a. The balance of the exchange differences in translating foreign financial statements at December 31,
2019 was P50,000 credit.
b. The translated balance of retained earnings in Philippine peso at December 31, 2019 was P119,500.
c. When Foreign Co. was incorporated, the exchange rate was 1FC = P67.20. No ordinary share changes
had occurred since then.
d. The following data were the exchange rates during the year:
January 1, 2020
1FC = P67.40
December 31, 2020
1FC = P67.60
Average for 2020
1FC = P67.50
1. Compute the cumulative translation adjustment to be reported on December 31, 2020
a. 51,775 credit
b. 51,775 debit c. 50,775 credit
d. 50,775 debit
2. Compute the translation adjustment for the year 2020
a. 1,775 debit
b. 1,775 credit c. 775 debit
d. 775 credit
PROBLEM 1 – Foreign Co.:
4
1)
Total Assets:
21,750 x P67.60
P 1,470,300
Total Liabilities: 11,500 x P67.60
Total SHE:
O/S: 5,000 x P67.20
*RE, end
Cumulative Translation Adjustment (Cr)
Total Liabilities & SHE
P 777,400
336,000
305,125
51,775 (balancing figure)
P 1,470,300
*RE, 12/31/20:
RE, 12/31/19
Add: Net Income (2,750 x 67.50)
RE, 12/31/20
P 119,500
185,625
P 305,125
2)
Cumulative translation adjustment, December 31, 2019
Translation adjustment for 2020 (balancing figure)
Cumulative translation adjustment, December 31, 2020
PROBLEM 2
P 50,000 credit
1,775 credit
P 51,775 credit
The following data are taken from the records of Elite Imports Company, a foreign subsidiary in
New Zealand:
NZ dollar
Total Assets
12/31/20
146,000
Total Liabilities
12/31/20
45,000
Common Stock
12/31/20
60,000
Retained Earnings
01/01/20
29,000
Net Income
2020 15,000
Dividends Declared
12/31/20
3,000
Exchange rates:
Closing/Current rate
Historical rate
Weighted Average Rate
P 10
11
12
The peso balance of retained earnings on December 31, 2019 is P325,000.
Compute the Cumulative Translation Adjustment reported in the Consolidated Statement of
Financial Position on December 31, 2020
a. 122,000 debit
b. 116,000 credit
c. 125,000 debit
d. 125,000 credit
PROBLEM 2 – Elite Imports Co.:
Total Assets: 146,000 x P10
Total Liabilities: 45,000 x P10
Total SHE:
O/S: 60,000 x P11
*RE, end
Cumulative Translation Adjustment (Dr)
Total Liabilities & SHE
*RE, 12/31/20:
RE, 12/31/19
Add: Net Income (15,000 x P12)
Deduct: Dividends (3,000 x P10)
RE, 12/31/20
P 1,460,000
P 450,000
660,000
475,000
(125,000) (balancing figure)
P 1,460,000
P 325,000
180,000
(30,000)
P 475,000
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PROBLEM 3
Cleared Corp. owns a subsidiary in Singapore whose Statement of Financial Position in Singapore
Dollars for the last two years follow:
Dec 31, 2020
Dec 31, 2021
Assets
Cash and Cash equivalents
S$ 90,000
S$ 75,000
Receivables
367,500
442,500
Inventory
480,000
510,000
Property and Equipment, net
765,000
690,000
S$ 1,702,500
S$ 1,717,500
S$ 165,000
S$ 225,000
Long-term debt
967,500
855,000
Common stock
345,000
345,000
Retained earnings
225,000
292,500
S$ 1,702,500
S$ 1,717,500
Total Assets
Liabilities and Equity
Accounts Payable
Total Liabilities and Equity
Relevant exchange rates are:
January 1, 2020
S$ 1 = P 45.00
December 31, 2020
S$ 1 = P 42.50
December 31, 2021
S$ 1 = P 47.50
Average 2020
S$ 1 = P 43.75
September 12, 2020
S$ 1 = P 40.00
Cleared formed the subsidiary on January 1, 2020. Income of the subsidiary was earned evenly
throughout the years and the subsidiary declared dividends worth S$15,000 on September 12, 2020
and none were declared during 2021.
Compute the cumulative translation adjustment in 2021
A. P1,818,750
B. P1,706,250
C. P3,018,750
D. P2,625,000
PROBLEM 3 – Cleared Corp.:
December 31, 2020:
Total Assets: 1,702,500 x P42.50
Total Liabilities: 1,132,500 x P42.50
Total SHE:
O/S: 345,000 x P45
P 72,356,250
P 48,131,250
15,525,000
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*RE, end
Cumulative Translation Adjustment (Dr)
Total Liabilities & SHE
*RE, 12/31/20:
Net Income, 2020 (240,000 x 43.75)
Deduct: Dividends, 2020 (15,000 x 40)
RE, 12/31/20
9,900,000
(1,200,000) (bal. figure)
P 72,356,250
P 10,500,000
(600,000)
P 9,900,000
December 31, 2021:
Total Assets: 1,717,500 x P47.50
P 81,581,250
Total Liabilities: 1,080,000 x P47.50
Total SHE:
O/S: 345,000 x P45
*RE, end
Cumulative Translation Adjustment (Cr)
Total Liabilities & SHE
*RE, 12/31/21:
Net Income, 2020 (240,000 x P43.75)
Add: Net Income, 2021 (67,500 x P45)
Deduct: Dividends, 2020 (15,000 x P40)
RE, 12/31/21
P 51,300,000
15,525,000
12,937,500
1,818,750 (bal. figure)
P 81,581,250
P 10,500,000
3,037,500
(600,000)
P 12,937,500
EXERCISES
THEORIES:
1. Under PAS 21, which of the following statements pertains to functional currency?
A. It refers to the currency of the primary economic environment in which the entity operates.
B. It refers to the currency in which the financial statements are presented.
C. It refers to the currency other than the functional currency of the entity.
D. It refers to the type of currency in a given jurisdiction which a creditor may be compelled to
accept.
2. Under PAS 21, what is the initial measurement of foreign currency denominated transaction?
A. Both monetary and nonmonetary items are measured initially at transaction or historical rate.
B. Monetary items are measured at closing rate while nonmonetary items are measured at
transaction rate.
C. Monetary items are measured at transaction rate while nonmonetary items are measured at
closing rate.
D. Both monetary and nonmonetary items are measured initially at closing rate.
3. Under PAS 21, what is the subsequent measurement of nonmonetary items?
A. Closing rate
C. Average rate
B. Transaction rate
D. Monthly rate
4. Under PAS 21, what is the subsequent measurement of monetary items?
A. Closing rate
C. Average rate
B. Transaction rate
D. Monthly rate
5. PAS 21 provides that exchange differences/(gain/loss) arising on the settlement or remeasuring
foreign currency transaction shall be recognized in
A. Profit or loss
C. Share premium
B. Other comprehensive income
D. Retained earnings
6. Which of the following items will result to foreign currency transaction gain/loss due to settlement
or remeasurement?
A. Foreign currency denominated income statement accounts such as revenue, income, expense or
loss.
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B. Foreign currency denominated non-monetary assets such as inventory, PPE, intangible asset or
prepaid asset.
C. Foreign currency denominated monetary items such as accounts payable, accounts receivable,
notes payable, loans receivable or interest payable.
D. Foreign currency denominated non-monetary liabilities such as unearned revenue, warranty
liability, premium liability and deferred tax liability.
E. Foreign currency denominated equity accounts such as ordinary shares, preference shares,
treasury shares and share premium.
7. PAS 21 provides that an entity may present its financial statements in any currency even different
from its functional currency. When the company translates its financial statements from its
functional currency to its selected presentation currency, how shall the exchange differences
arising from the translation be recognized?
A. It shall be recognized in profit or loss.
B. It shall be recognized in other comprehensive income with reclassification adjustment to profit
or loss if realized.
C. It shall be recognized in other comprehensive income without reclassification adjustment and
reclassified directly to retained earnings if realized.
D. It shall be recognized directly to retained earnings.
8. When translating the financial statements of an entity from its functional currency to its selected
presentation currency, which of the following translation measurements is incorrect?
A. Assets and liabilities are translated at the closing rate at the date of statement of financial
position.
B. Income and expenses are translated at (1) exchange rates at the date of the transaction or (2)
Average rate for the period for practicality.
C. Equity accounts other than retained earnings are translated at the date of the transaction
resulting in that equity item.
D. Retained earnings are translated using the average rate during the period.
PROBLEMS:
9. CC Corp. owns a subsidiary in Japan whose statement of financial position in Japanese Yen for the
last years follow:
December 31, 2019
December 31, 2020
¥ 30,000
122,500
160,000
255,000
¥ 567,500
¥ 25,000
147,500
170,000
230,000
¥ 572,500
¥ 55,000
322,500
115,000
75,000
¥ 567,500
¥ 75,000
285,000
115,000
97,500
¥ 572,500
Assets
Cash and cash equivalents
Receivables
Inventory
Property and equipment, net
Total Assets
Liabilities and Equity
Accounts payable
Long-term debt
Common stock
Retained earnings
Total Liabilities and Equity
Relevant exchange rates are:
January 1, 2019
December 31, 2019
December 31, 2020
¥1 = P45.00
¥1 = P42.50
¥1 = P47.50
Average for 2019
September 12, 2019
¥1 = P43.75
¥1 = P40.00
CC formed the subsidiary on January 1, 2019. Income of the subsidiary was earned evenly
throughout the years and the subsidiary declared dividends worth ¥15,000 on September 12, 2019
and none were declared during 2020.
How much is the cumulative translation adjustment for 2020?
a. P625,000
b. P568,750
c. P1,006,250
d. P875,000
8
Items 10 and 11 are based on the following information:
A subsidiary of Salisbury, Inc. located in a foreign country whose functional currency is the foreign
currency (which is not the currency of a hyperinflationary economy). The subsidiary acquires
inventory on credit on November 1, 2012, for 100,000 foreign currencies that is sold on January 1,
2013 for 130,000 foreign currencies. The subsidiary pays for the inventory on January 31, 2013.
Currency exchange rates for 1 FC are as follows:
November 1, 2012
December 31, 2012
January 17, 2013
January 31, 2013
Average for 2013
P 0.16 = 1 FC
P 0.17 = 1 FC
P 0.18 = 1 FC
P 0.19 = 1 FC
P 0.20 = 1 FC
10. What amount does Salisbury’s consolidated balance sheet report for this inventory at December
31, 2012?
a. P16,000
b. P17,000
c. P18,000
d. P19,000
11. What amount does Salisbury’s consolidated income statement report for cost of goods sold for the
year ending December 31, 2013?
a. P16,000
b. P17,000
c. P18,000
d. P19,000
12. Certain balance sheet accounts of a foreign subsidiary of Rose Company have been stated in
Philippine pesos as follows:
Current rates
Historical rates
Accounts receivable, current
P 200,000
P 220,000
Accounts receivable, long-term
100,000
110,000
Prepaid insurance
50,000
55,000
Goodwill
80,000
85,000
P 430,000
P 470,000
The subsidiary’s functional currency is a foreign currency which is not the currency of a
hyperinflationary economy. What amount should Rose’s balance sheet include for the preceding
items?
a. P430,000
b. P435,000
c. P440,000
d. P450,000
13. On January 1, 2020, Kiner Company formed a foreign branch. The branch purchased merchandise
at a cost of 720,000 LCU on February 15, 2020. The purchase price was equivalent to P180,000 on
this date. The branch’s inventory at December 31, 2020 consisted solely of merchandise purchased
on February 15, 2020, and amounted to 240,000 LCU. The exchange rate was 6 LCU to P1 on
December 31, 2020, and the average exchange rate was 5 LCU to P1 for 2020. In Kiner’s December
31, 2020 balance sheet, the branch inventory balance of 240,000 LCU should be translated into
Philippine pesos at (using closing rate method).
a. P40,000
b. P48,000
c. P60,000
d. P84,000
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