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
