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If the equity balances result from income and expenses presented in OCI (e.g.
revaluation surplus), then it’s more appropriate to translate them at the rate at the transaction date.
It’s true that the standard IAS 21 is silent on this matter. Some time ago, the exposure draft proposed to translate the equity items at the closing rate, but it was not included in the standard. It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included.
It means that in most cases, companies decide whether they apply closing rate or historical rate. In my own past practice, I’ve seen both cases – closing rates and historical rates, too. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Let me describe what’s the most appropriate in my opinion, but please remember, that it results from the practice and common sense, not from the rules (as there are none).
Many people assume that exchange differences on intragroup receivables or payables should NOT affect the consolidated profit or loss. In fact, they do affect profit or loss, because the group has some foreign exchange exposure, doesn’t it? UK parent sold goods to the German subsidiary for GBP 10 000 on 30 November 2016 and as of 31 December 2016, the receivable is still open.
In today’s world, most groups spread their activities abroad and logically different members of the group operate in different currencies.
Is the consolidation process of combining the financial statements of two (or more) companies different when they operate in different currencies? If you want to combine the financial statements prepared in different currencies, you will still follow the same consolidation procedures.
It stays there and it will become a part of a consolidated profit or loss, because it reflects the foreign exchange exposure resulting from foreign trade. On the consolidation, the exchange rate gain of EUR 50 recorded in the German financial statements in profit or loss (together with the difference that arises on translation of the EUR 50 by the average rate).
With regard to profit or loss items, or intragroup sales – you should translate them at the date of a transaction if practical.