20 March 2014
Where an Indian Company has acquired a foreign subsidiary, would goodwill arising on consolidation need to be restated at every period end in the consolidated financial statements?
requesting everyone to please respond to my query on urgent basis
26 July 2024
Yes, goodwill arising on the consolidation of a foreign subsidiary does change from period to period due to currency fluctuations. This is in accordance with the principles laid out under **Accounting Standard 21 (AS 21) - Consolidated Financial Statements** and **Accounting Standard 11 (AS 11) - The Effects of Changes in Foreign Exchange Rates**.
### **Goodwill on Consolidation of Foreign Subsidiary: Key Points**
1. **Goodwill Calculation**: - **Initial Recognition**: At the time of acquisition, goodwill is recognized as the excess of the purchase consideration over the fair value of identifiable net assets of the subsidiary. - **Goodwill on Consolidation**: In the consolidated financial statements, goodwill is calculated based on the exchange rate prevailing at the date of acquisition.
2. **Restatement of Goodwill**: - **Currency Fluctuations**: Since the financial statements of the foreign subsidiary are prepared in a foreign currency, the goodwill recognized on consolidation needs to be translated into the reporting currency (Indian Rupees) of the parent company. - **Periodic Restatement**: Goodwill, as part of the net assets of the foreign subsidiary, is subject to translation adjustments due to fluctuations in the exchange rates. Therefore, it will be restated at each period-end to reflect the current exchange rate.
3. **Impact of Currency Fluctuations**: - **Translation Differences**: The restated goodwill may differ from the amount initially recognized due to changes in exchange rates. These translation differences are typically recognized in a separate component of equity (e.g., Foreign Currency Translation Reserve) rather than in profit or loss.
4. **Accounting Treatment**: - **On Consolidation**: At each reporting date, the goodwill is translated using the closing exchange rate. - **Exchange Rate Adjustments**: Any differences arising from the translation of goodwill and other assets or liabilities of the foreign subsidiary are included in the Foreign Currency Translation Reserve, which is part of the equity in the consolidated financial statements.
### **Example of Restatement**
**Initial Recognition**: - **Date of Acquisition**: 1st April 2023 - **Purchase Consideration**: $10L - **Exchange Rate on Acquisition Date**: 1 USD = ₹75 - **Goodwill on Acquisition**: $10L × ₹75 = ₹750L
**Translation Adjustment**: - **Change in Goodwill**: ₹800L (Restated) - ₹750L (Original) = ₹50L - **Accounting Entry**: The ₹50L difference would be adjusted in the Foreign Currency Translation Reserve in equity.
### **Accounting Standards Reference**
- **AS 21 (Consolidated Financial Statements)**: Addresses the need for consolidating financial statements of the parent and its subsidiaries and provides guidance on the treatment of goodwill on consolidation. - **AS 11 (The Effects of Changes in Foreign Exchange Rates)**: Deals with the translation of foreign currency financial statements into the reporting currency and the treatment of exchange rate differences.
### **Summary**
- Goodwill arising from the acquisition of a foreign subsidiary is subject to translation adjustments due to currency fluctuations. - This goodwill is restated at the closing exchange rate at each reporting period. - Differences arising from such restatement are recorded in the Foreign Currency Translation Reserve.
It's crucial to consistently apply these principles to ensure accurate financial reporting and compliance with accounting standards. For detailed guidance and specific scenarios, consulting with a professional accountant or auditor is recommended.
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