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A. Objective:

This topic covers accounting for non integral operations under AS 11 in specific and its comparison with IAS 21.

B. Back Ground:

With the intent to Go Global, Indian entrepreneurs are now expanding their business focus in various geographies outside India. Indian Multinational Corporations such has Tata Steel, Tata Motors, Hindalco, Sterlite, etc have retained their flagship operations in India and acquired subsidiaries in foreign jurisdictions.

With this globalisation, comes the need to report the operations of the entire Group in one currency. Though under Indian GAAP, entities having subsidiaries are not required to present Consolidated Financial Statement under AS 21, listing requirements on Stock exchange make it necessary for entities to follow AS 21- Consolidated Financial Statements. It is to be notes that the leeway existing in Indian Accounting Standards will go away once Ind ASs are made effective. This is because IFRS i.e. Ind AS makes it compulsory for entities to Consolidate financial statements even if it is not listed, with certain exemptions as prescribed under IAS 27 i.e. Ind AS 27 – Consolidated financial Statements. 

The requirements of reporting foreign non integral operations in CFS of holding company are same under existing AS 11 when compared to IAS 21. Though there is no difference between functional currency and reporting currency under AS 11. It is considered that INR is the currency of accounting in books and also to report the consolidated results of the Company on stock exchanges. Till date no entity has reported its financial statements in any currency other than INR unlike IFRS where there is choice to report in any currency irrespective of currency used for accounting purposes.

C. Procedure:

An entity has to submit its Consolidated Financial Statements of the entire Group following the principle of a single economic entity and same to be presented in one reporting currency ie INR.

In preparing consolidated financial statements, an entity combines the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, income and expenses. If the reporting currency and the currency in which the books are maintained is same, then there is no translation difference at consolidation. Translation difference originates because the currency in which the books are maintained is different than the currency in which the Group reports its financials. In this case of Consolidation, balance sheet items of each entity are translated at closing rates and income statement items are translated at period average rates for presenting its Consolidated Financials in Group’s Reporting currency.

As the exchange rate is not constant between the two balance sheet dates, there arises a difference on account of considering a different exchange rate for translating the subsidiary’s results at every balance sheet date.

D. Translation process defined in AS 11, extracts are as follows:

“Non-integral Foreign Operations

24. In translating the financial statements of a non-integral foreign operation for incorporation in its financial statements, the reporting enterprise should use the following procedures:

(a) the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation should be translated at the closing rate;

(b) income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions; and

(c) all resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment.

25. For practical reasons, a rate that approximates the actual exchange rates, for example an average rate for the period, is often used to translate income and expense items of a foreign operation.

Tax Effects of Exchange Differences

35. Gains and losses on foreign currency transactions and exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes on Income.

E. Understanding drawn

1. Translation reserve arises at Consolidation when a particular subsidiary maintains it books of accounts other than INR. (India Specific)  

2. Opening and closing exchange rate for the particular subsidiary for translation are different.

3. Parent share of Translation reserve is presented separately in reserves and minority share is grouped under Minority interest.

4. These are though subject to deferred taxes but under Indian GAAP where deferred taxes are based on Income approach, these balance sheet movements are in any case not covered. These are similar to revaluation reserve, which are not subjected to deferred tax unlike IFRS which follows balance sheet approach.

5. Moreover, under IFRS also, such exchange differences do not give rise to any temporary differences associated with the foreign operation's assets and liabilities. This is because both the carrying amounts of the assets and liabilities and their respective tax bases will be measured in the foreign entity's accounting currency at the balance sheet date and, therefore, any timing differences arising would have been recognised by the foreign entity as part of its deferred tax balances in its own financial statements. These deferred tax balances translated at the year-end exchange rate will simply flow through on consolidation and no further adjustment would be necessary.

6. As a point of reference, SIC 26 also concludes as: “While preparing consolidated financial statements, the tax expense to be shown in the consolidated financial statements should be the aggregate of the amounts of tax expense appearing in the separate financial statements of the parent and its subsidiaries.”

CA Sanjay Chauhan

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