Foreign currency (ii): foreign operations

A Nigerian group buys a company in Ghana. The Ghanaian company keeps its books in cedis, but the group reports in naira. Before the two can be added together, every figure in the subsidiary’s statements must be converted. Because the rate changes through the year, no single rate works for everything. Assets and liabilities are converted at the rate on the last day.

Income and expenses are converted at the rates when they happened. The two will not agree with each other, and the difference has to go somewhere. That difference is the heart of this topic.

This topic covers the three stages of consolidating a foreign operation, the translation rules, exchange differences and the translation reserve, goodwill and fair value adjustments, a full consolidation example and the treatment on disposal. The previous topic covered transactions of an individual entity under International Accounting Standard (IAS) 21. The next topic covers the statement of cash flows. November 2025 Question 1 included a Ghanaian subsidiary for 30 marks.

Key terms in plain English

Syllabus check

IAS 21 is examinable under syllabus area C. This topic covers:

• translating the statements of a foreign operation for consolidation, and the exchange reserve;
• goodwill and fair value adjustments on a foreign subsidiary, and disposal.

CAMA 2020 and foreign operations

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow International Financial Reporting Standards (IFRS) and give a true and fair view.

The three stages

These rules apply where the foreign entity’s functional currency is not hyperinflationary. If it is, IAS 29 applies first.

Translation rules

• Statement of financial position: assets and liabilities at the closing rate, including purchased goodwill. Comparatives are at the same rate as the previous year’s closing rate.
• Statement of profit or loss: income and expenses at the spot rates on the transaction dates. An average rate may be used if it approximates them.
• Equity: share capital and pre-acquisition reserves at the rate on the acquisition date; post-acquisition profits at the rates at which they were translated in the profit or loss statement.
• Exchange differences go to other comprehensive income and to a separate reserve in equity, not to profit or loss. They are credited (gain) or debited (loss).

Where the difference comes from

1. Profit is translated at the average rate but sits in net assets at the closing rate.
2. The opening net assets were translated at last year’s closing rate and are now translated at this year’s closing rate.

IAS 21 keeps these out of profit or loss because changes in the exchange rate on these items have little or no effect on cash flows from operations. Including them would be misleading.

Goodwill and fair value adjustments

Goodwill and fair value adjustments on acquiring a foreign subsidiary are treated as assets of the foreign operation. They are stated in the subsidiary’s currency and retranslated at each closing rate. The exchange difference goes to other comprehensive income and the translation reserve. The reason is that the price paid reflects expected earnings in the foreign economy, so goodwill belongs to that economy.

NCI and disposal

• The NCI takes its share of the subsidiary’s net assets at the closing rate. Its share of the exchange difference is part of the NCI.
• The parent’s share of the exchange differences is in the translation reserve, along with the exchange difference on goodwill.
• On disposal of the foreign operation, the cumulative translation reserve is reclassified to profit or loss as part of the gain or loss on disposal. On a part disposal that does not lose control, the proportionate share is moved to the NCI and not to profit or loss.
• A foreign currency borrowing or derivative designated as a hedge of the net investment is covered in the topic on hedge accounting.

The rules in more depth

Why two rates

Assets and liabilities are valued at one date, so the closing rate is the right rate for them. Profit is earned throughout the year, so the average rate shows what it was worth when earned.

Why the difference is not in profit

The parent has not converted any cash. The swing is on the group’s investment in the foreign business, which will only become cash when it is sold.

Why goodwill moves with the rate

The group bought a business in the foreign economy. The goodwill is an asset of that business, so it is worth more or fewer naira when the currency moves.

Effect on analysis

A large translation reserve shows how much of equity depends on the exchange rate. A weaker foreign currency reduces group equity even when the foreign business performs well.

Worked examples

1. Opening net assets.
   $20,000 ÷ 1.70 = £11,765.
   At the closing rate: $20,000 ÷ 1.90 = £10,526.
   Loss £1,239.
2. Profit.
   $10,000 ÷ 1.80 = £5,556.
   At the closing rate: $10,000 ÷ 1.90 = £5,263.
   Loss £293.
3. Total exchange loss.
   £1,239 + £293 = £1,532 in other comprehensive income and the translation reserve.

1. Goodwill = $8m − $3m = $5m.
   At acquisition: $5m ÷ 2.00 = £2.5m.
2. At 31 December: $5m ÷ 1.90 = £2.632m.
3. Exchange gain = £0.132m, in other comprehensive income and the translation reserve.

1. Net assets of JK:
   at acquisition Fl 64 + 40 + 160 = Fl 264m.
   Now Fl 294m.
   Post-acquisition profit = Fl 30m.
2. Goodwill.
   Fl 240m − 75% × 264 (198) = Fl 42m.
   At acquisition: 42 ÷ 5.0 = $8.4m.
   At the closing rate: 42 ÷ 4.2 = $10.0m.
   Exchange gain = $1.6m.
3. Translate JK:
   tangible assets 292 ÷ 4.2 = 69.5; current assets 204 ÷ 4.2 = 48.6; non-current liabilities 19.5; current liabilities 28.6.
   Net assets = 294 ÷ 4.2 = $70.0m.
4. JK’s equity:
   share capital 64 ÷ 5.0 = 12.8
   share premium 40 ÷ 5.0 = 8.0
   pre-acquisition retained earnings 160 ÷ 5.0 = 32.0
   post-acquisition profit 30 ÷ 4.0 = 7.5.
   Total 60.3.
   The balance of $70.0m − $60.3m = $9.7m is the exchange difference.
5. NCI.
   (25%) = 25% × $70.0m = $17.5m.
   (It is made up of 13.2 at acquisition + 25% of the profit 1.9 + 25% of the exchange difference 2.4.)
6. Group reserves:
   retained earnings = 720 + 75% × 7.5 = $725.6m.
   Translation reserve = 75% × 9.7 (7.3) + goodwill gain 1.6 = $8.9m.
7. Statement: tangible assets 663.5; goodwill 10.0; current assets 816.6; total 1,490.1. Equity: share capital 120.0; share premium 100.0; retained earnings 725.6; translation reserve 8.9; = 954.5; NCI 17.5; total equity 972.0. Liabilities: non-current 79.5; current 438.6. Total 1,490.1.

Note: ICAN\u2019s first solution to this question translates the post-acquisition profit at the closing rate (Fl 4.2), does not use the average rate given, and shows one combined \u201cretained earnings\u201d figure of 4.4m. ICAN\u2019s later Example 11 (the same company, acquired one year earlier) uses the average rate and shows the translation reserve of .9m and the NCI of .5m separately, as we do.

So we follow ICAN\u2019s second method, which agrees with IAS 21. Our retained earnings and reserve add to 4.5m, which agrees with 4.4m apart from rounding. In the exam, use the average rate when it is given and show the reserve separately.

1. Opening net assets: ₦100,000 at the start; ₦80,000 at the end. Loss ₦20,000.
2. Profit: ₦18,182 at the average rate; ₦16,000 at the closing rate. Loss ₦2,182.
3. Total exchange loss = ₦22,182, in other comprehensive income.
   Closing net assets = 240,000 ÷ 2.5 = ₦96,000.

1. Include the gain or loss on disposal as normal (proceeds, NCI, net assets and goodwill).
2. Reclassify the ₦9m credit from the translation reserve to profit or loss, so the total gain on disposal is higher by ₦9m.
3. Check with ICAN\u2019s example: proceeds \u20a637m less net assets and goodwill \u20a630m is a gain of \u20a67m. The exchange gain of \u20a62m previously in other comprehensive income is reclassified, so the profit or loss total is \u20a69m. A debit of \u20a62m in other comprehensive income removes it there, so it is not counted twice.
4. If the parent sold only part and kept control, the proportionate share of the reserve would go to the NCI and not to profit or loss.

How to score full marks

• Follow the three stages in order.
• Show the rate beside every translated figure.
• Use the average rate for profit or loss if it is given.
• Translate goodwill and fair value adjustments at the closing rate and show the gain or loss.
• Show the translation reserve separately and explain that the difference is in other comprehensive income.
• Give the NCI its share of the closing net assets.
• State the reclassification on disposal.

Common mistakes in the exam

• Translating all items at the closing rate.
• Taking the exchange difference to profit or loss.
• Leaving goodwill at the acquisition-date rate.
• Ignoring the average rate that the question gives.
• Combining the translation reserve with retained earnings.
• Forgetting the NCI’s share of the exchange difference.
• Not reclassifying the reserve on disposal.

Quick revision

• Adjust, translate, consolidate.
• Assets and liabilities at the closing rate. Profit or loss at the average rate. Pre-acquisition equity at the acquisition-date rate.
• Exchange differences in other comprehensive income and the translation reserve.
• Goodwill and fair value adjustments are retranslated each year.
• On disposal, reclassify the reserve to profit or loss.
• CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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