Workbook on IAS 21 Effects of foreign exchange

Definitions

Foreign Operation

A foreign operation is a branch, associate, joint venture or subsidiary, where the activities are conducted in a different country to that of the parent undertaking.

Presentation Currency

The presentation currency is that used in the parent’s and in the consolidated financial statements.

FUNCTIONAL CURRENCY

The functional currency is the currency of the primary economic environment in which the undertaking operates.

Foreign Currency

Foreign currency is any currency other than the functional currency.

Exchange Difference

Exchange difference is the difference calculated from reporting the same number of units of a foreign currency at different exchange rates.

Closing Rate

The closing rate is the spot exchange rate at the balance sheet date.

Net Investment in a Foreign Undertaking

The net investment in a foreign operation is the parent’s share of the net assets of the undertaking.

Spot exchange rate

The Spot exchange rate is the exchange rate for immediate delivery.

Foreign Currency Transactions in the Normal Course of Business

Transactions and Investments in Foreign Currencies

Transactions and investments in foreign currencies increase business risk due to the currency fluctuations against the national currency.

Holding any assets, or liabilities, denominated in foreign currency entails a currency risk. There is a risk that you will make a profit or loss, if the exchange rate changes when settlement is made. Techniques such as hedging, forward contracts and options may be employed to reduce risk.

International business necessitates many firms trading in foreign currencies. The time between quoting a price fixed in a foreign currency, and finally receiving the funds should be minimised to limit risk.

Example:

You quote a price of $1000 for an item. Based on today’s exchange rate, you will make a profit of 25%. However, the Currency X strengthens against the $ by 10% per month, eliminating your profit before you receive the cash in month 5:

While this illustration is extreme, the risk is always present. Investments, such as a foreign branch or subsidiary, increase the time that the parent is at risk to currency fluctuations.

The foreign operation may trade profitably, but the investment may be adversely hit by a fall in the foreign currency against that of the parent.

Commission costs, incurred in buying or selling foreign currencies, reduce profits. Exchange controls may inhibit the parent from repatriating funds to reduce risk.

A firm needs to know its foreign exchange exposure, from transactions and investments. It needs to develop and refine a strategy to handle fluctuations in each currency to which it is exposed.

When a gain, or loss, on exchange is realised by settling a foreign currency item, nothing more can be done, except to update the books of account.

Only a review of the unrealised gains and losses provides opportunities for performance improvement.

Initial Recognition of a Transaction

If a company transacts business, or holds assets or liabilities in a foreign currency, the transaction should be accounted for at the exchange rate on the day of the transaction. The rate that should be used is the mid-market rate ‘spot’ rate on the day the transaction takes place.

An average rate may be used for a week, or a month, for all transactions in each foreign currency, if there is no material fluctuation in the exchange rates.

The date of the transaction is the date when the transaction is contracted, or recognised, rather than the date of receiving (or paying) cash. If the receipt of cash is earlier, a payment in advance is registered. If later, an account receivable, or payable, would be recognised at the spot rate.

Example:

On 1^st January, you sell $100 of services to a foreign customer on credit. The exchange rate is $1=30 Currency X.

In the Currency X books of account, you:

Debit Accounts Receivable 3000

Credit Sales 3000

The cash is received in $ on February 1^st when the exchange rate is $1 = 25 Currency X. The Currency X is stronger and the dollar weaker compared to the rate on January 1^st .

In the Currency X books of account, you:

Debit Cash 2500

Debit Exchange Loss 500

Credit Accounts Receivable 3000

In this case, less Currency X (500) are received than would have been the case had the $100 been received on 1^st January.

If the dollar had strengthened against the Currency X, by February 1^st , more Currency X would have been received in exchange for the $100. For example if the rate had been $1=40 Currency X, this would have created an exchange gain of 1000 Currency X.

Gain or Loss?

If you keep your books in Currency X, but trade is denominated in $, movements in the $ against the Currency X will have the following results from your $ denominated assets and liabilities:

Reporting at Balance Sheet Dates

Monetary items (money held, assets receivable, and liabilities payable, in cash or cash equivalents) will be reported at the closing rate (mid-market rate on the balance sheet date).

Non-monetary items (such as property, plant and equipment) should be reported at the exchange rate of the transaction.

This will either be the exchange rate of historic cost, or the valuation date, where fair values are used.

Example:

Equipment was bought from abroad on Jan 1^st , but had not been paid for by March 31^st , when the period ended.

The exchange rates were:

January 1^st $1=30 Currency X.

March 31^st $1=24 Currency X.

The cost of the equipment was $2000, and depreciation for the period was 5% of cost.

In the Currency X books of account, the following balances would appear:

Equipment cost 60000

Depreciation 3000

Net book value 57000

Accounts payable 48000

Exchange gain 12000 (re accounts payable)

Notes: Cost = 2000*30= 60000

Depreciation= 5% (60000)= 3000

Accounts Payable= 2000*24= 48000

Exchange Gain= 2000* (30-24)= 12000

The $ fall against the Currency X gives a benefit when settling the accounts payable. Had the $ risen, the $2000 would have cost more Currency X, generating an exchange loss in the period.

Accounting Treatment of Exchange Differences

Exchange differences on monetary items should be recognised in the period’s income statement, even if the difference has not been realised (by settlement) by the balance sheet date. If it has not been settled, then further exchange differences may occur in later periods.

An exception to this is where a monetary item forms part of the parent’s net investment in a foreign operation (such as an inter company loan) the exchange difference should be recorded in equity, until the disposal of the net investment. Upon disposal, it will be recorded as a gain, or loss, in the income statement.

Example:

A holding company sets up a subsidiary abroad with net assets of $1 million.

You structure this subsidiary with $1000 of share capital and $999.000 of inter company loan.

The inter company loan should be considered as part of the net investment in the subsidiary (referred to as quasi-capital) and any exchange differences relating to it will be recorded in changes to the value of equity.

If the exchange rate when the company was set up was $1=30 Currency X and at the balance sheet date was $1=32 the value of the loan has altered by

[999,000 x (32-30)=19,980].

The 19,980 exchange gain should be added to the equity of the holding company.

The undertaking that has a monetary item receivable from or payable to a foreign operation may be any subsidiary of the group. For example, an undertaking has two subsidiaries, A and B. Subsidiary B is a foreign operation.

Subsidiary A grants a loan to Subsidiary B. Subsidiary A's loan receivable from Subsidiary B would be part of the undertaking's net investment in Subsidiary B if settlement of the loan is neither planned, nor likely to occur in the foreseeable future. This would also be true if Subsidiary A were itself a foreign operation.

Non-monetary items that are measured at fair value

Non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined.

This group is rare for most undertakings. If a property has been revalued in US$ and the functional currency of the undertaking is Currency X, the valuation is translated at the spot rate of the date on which it was valued.

When it is revalued again in US$, then the revaluation is translated at the spot rate of the new valuation.

Financial Statements of Foreign Operations

Presentation Currency

The presentation currency of a group is the currency of the IFRS statements, and may be dictated by the nation in which the firm is located, or the financial market in which its securities are sold.

Consolidation of foreign operations uses the rules of presentation currency.

IFRS statements may be produced under more than one presentation currency to meet demands of readers. For banks, providing statements in different currencies may be of interest to (international) correspondent banks.

Functional Currency

Underlying the presentation currency is the functional currency. There is only one functional currency for each company.

This reflects the currency of the operations, rather than that of the users of the accounts.

The functional currency is central to reporting under IFRS. The results of all operations will be translated into the functional currency. The results will then be translated into the presentation currency.

Whilst the parent firm’s national currency will be the appropriate reporting choice in most cases, many firms operate in a commercial world dominated by other currencies.

The functional currency reflects the underlying transactions, events and conditions that are relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions.

Those firms in the oil industry, regardless of the country in which they operate, are dominated by transactions in US$. To prepare accounts in currencies other than US$ would lead to major changes in results due to exchange movements between the US$ and their home currencies.

Determining The Functional Currency

The primary economic environment in which an undertaking operates is normally the one in which it generates cash.

The functional currency is that which mainly influences sales prices for goods and services, and of the country which influences costs of labour and materials.

Other factors that may influence the determination of the functional currency are:

 The currency in which funds from financing activities are generated (debt and equity instruments).

 The currency in which receipts from operating activities are usually kept.

The following additional factors are considered in determining the functional currency of a foreign operation, and whether its functional currency is the same as that of the reporting undertaking (the reporting undertaking, being the owner of the foreign operation as its subsidiary, branch, associate or joint venture):

 whether the activities of the foreign operation are carried out as an extension of the reporting undertaking, rather than being carried out with a significant degree of autonomy.

 whether transactions with the reporting undertaking are a high, or low, proportion of the foreign operation’s activities.

 whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting undertaking, and are readily available for remittance to it.

 whether cash flows from the activities of the foreign operation are sufficient to service debt obligations, without funds being made available by the reporting undertaking.

When the above indicators are mixed and the functional currency is not obvious, management uses its judgment to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

Each firm determines its functional currency for itself. The same functional currency will apply to all group members on consolidation. All foreign currency items will be translated into the functional currency.

Example: Functional currency determination

Undertaking C operates an information distribution website dealing in current affairs, weather and other news. The website is written in Mandarin, and it is estimated that 95% of users who access the website reside in China. The undertaking generates revenue through the placement of advertisement ‘banners’on the website’.

The customers who place banners on the website are all multinational companies. The servers are located in Jersey for tax purposes.

The costs of maintaining the website are paid to employees in China in dollars. The customers are invoiced in dollars.

The undertaking’s funding is held in various currencies, including euros, dollars and sterling. Revenues and costs are denominated in dollars, as it is a more stable and liquid currency than the Chinese yuan.

What is the functional currency of the undertaking?

The functional currency of the undertaking is the Chinese yuan.

An undertaking’s functional currency is the currency of the primary economic environment in which the undertaking operates.

An undertaking’s functional currency will therefore be driven primarily by the environment that determines the selling price of its services and the costs that it needs to incur to provide those services.

The customers that utilise the website reside mainly in China, so the price at which the undertaking can sell its advertising services will be driven by the Chinese, not the US, economy.

Although the undertaking pays its costs in dollars, the remuneration that employees will demand will be driven by the Chinese, and not the US, economy. The fact that items are denominated in dollars is not relevant in this case.

An undertaking's functional currency reflects the underlying transactions, events and conditions that are relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions.

Example: Change of functional currency

Undertaking C is a UK company which is applying IAS 21 for the first time in its financial statements for the year ending 31 December 20X6.

Undertaking C previously prepared its undertaking financial statements in US dollars.

However, on applying the criteria in IAS 21, the functional currency is considered to be pound sterling. There are no other changes in circumstances that would lead to a change in functional currency.

Can C account for the change in functional currency prospectively from the date of change?

No, this is allowed if there is a change in functional currency due to a change in the underlying transactions, events and conditions.

In this case there has not been a change in circumstance, so the above rules are not applicable.

Instead, IAS 21 must be applied retrospectively in full as a change in accounting policy.

In order to calculate what the IAS 21 prior period adjustment should be in the undertaking financial statements, it will be necessary to:

(a) retranslate the previously presented local currency (US$) financial statements into sterling; and

(b) restate those sterling numbers as if IAS 21 had been applied retrospectively in full, that is as if sterling had always been the functional currency.

Translation of local currency to functional currency

Each transaction is translated to the functional currency at the following exchange rate:

Monetary items (money held, assets receivable, and liabilities payable, in cash) will be reported at the rate ruling on the balance sheet date (mid market closing rate).

Non-monetary items (such as property, plant and equipment) will be reported at the exchange rate of the transaction.

This will either be the exchange rate of historic cost, or the valuation date, where fair values are used.

Examples of these transactions are in the previous section.

Translation of functional currency to presentation currency

Assets and liabilities

The closing rate of the presentation currency, on the balance sheet date, should be used for assets and liabilities of a foreign undertaking. This includes goodwill and fair value adjustments.

Income and expenses

Income and expenses should be translated at the rate of the day of transactions.

The net exchange differences resulting should be classified as equity.

This will be seen when the change in the net assets, expressed in the presentation currency, differs from the net profit, expressed in the presentation currency. The net profit will be expressed in a compound rate, reflecting transactions throughout the period.

Often, individual monthly accounts are aggregated when producing quarterly or annual accounts, each translated at their own exchange rate, to calculate the net profit, expressed in the presentation currency.

Example:

A foreign venture is started on January 1^st with $1 million of inventory provided by third parties. The inventory is sold for $1.1 million in various transactions during the month.

$1 million is paid to settle the accounts payable, leaving $100000 in cash on 31^st January.

The exchange rates were:

January1^st $1=30 Currency X.

January31st $1=22 Currency X.

Average rate $1=26 Currency X

Translations to Currency X are as follows:

Cash balance =$100.000*22= 2,2 million Currency X (period-end rate)

Net profit =$100.000*26= 2,6 million Currency X (average rate)

Exchange loss = 0,4 million Currency X

(difference classified as equity)

The cash balance determines the overall result, as this is the increase in the value of the investment.

The net profit does not fully reflect the month-end balance sheet, and the exchange loss is needed to balance the accounts.

Only when the cash is repatriated to the parent will the exchange loss (or gain) be realised.

However the (unrealised) gain, or loss will be calculated each month, and transferred to equity.

Where the foreign operation was owned in a previous period, as opposed to being purchased, or inaugurated, in the period, the opening net investment of the period needs to be restated at the closing exchange rate.

Exchange differences are transferred to equity.

Example:

A foreign venture is started on January 1^st with $1 million of inventory provided by third parties. The inventory is sold for $1.1 million in various transactions during the month. $1 million is paid to settle the accounts payable, leaving $100000 in cash on 31^st January. This trading pattern is repeated in February.

The exchange rates were:

^{January 1st $1=30 Currency X.}

^{January 31st $1=22Currency X.}

Average rate $1=26Currency X

February 1^st $1=25Currency X

February 28^th $1=37Currency X

Average rate $1=31Currency X

Translations to Currency X are as follows:

January

Cash balance =$100000*22=2,2million Currency X (period-end rate)

Net profit =$100000*26 =2,6million Currency X(average rate)

Exchange loss =0,4million Currency X(difference) (classified as equity)

February

Restate opening cash balance @ closing rate:

$100000 * (37-22) = 1,5million Currency X = exchange gain (classified as equity)

Cash balance =$200000 * 37 =7,4million Currency X (period-end rate)

Net profit = $100000 * 31 =3,1million Currency X (average rate)

Exchange gain on net profit $100000* (37-31) = 0,6 million Currency X (classified as equity)

Reconciliation:

Cash balance =$200000 * 37 =7,4 million Currency X

Net Profit January =2,6 million

Net Profit February =3,1 million

Exchange loss January =-0,4 million

Exchange gain on cash =1,5 million

Exchange gain February =0,6 million

Total =7,4 million Currency X

Exchange differences arising from changes to equity, such as capital increases or dividends, should also be transferred to equity.

Minority Interests (Non-controlling interests)

Often an undertaking owns 100% of a subsidiary operation. When it does not, the shares that it does not own, and are not owned by other members of the undertaking’s group, are referred to as Minority Interests (or ‘Non-controlling interests’).

Minority interests are third-party partners in a subsidiary.

Where there are minority interests relating to foreign undertakings, their share of exchange gains (and losses) should be added to the Minority Interests (Non-controlling interests) in the consolidated balance sheet.

For example, if minority interests own 20% of a foreign undertaking, 20% of exchange differences relating to that undertaking should be transferred to Minority Interests in each period. As this is only a book entry, no money is transferred as a result.

Example:

Net assets (held as an investment) of an 80% owned foreign subsidiary are $10 million. No trading takes place in the period.

The exchange rates were:

January 1^st $1=30 Currency X.

January 31^st $1=35 Currency X.

The exchange gain is:

$10 million * (35-30) =5 million Currency X.

As the parent owns only 80%, 4 million Currency X of gain are recorded as equity, and the remaining 1 million Currency X are added to minority interests in the balance sheet.

Inter company balances should be agreed by each party prior to finalising the financial statements submitted for consolidation.

Exchange differences frequently occur.

It is vital to record the foreign currency amount, as well as the Currency X amount, of each transaction. Each transaction will have its own exchange rate, and the total amount in foreign currency will not be easy to calculate without this information.

Exchange differences should be written off to the Income Statement, unless the balance forms part of the parent’s net investment in a foreign operation (such as an inter company loan).

In such a case, the exchange difference should be recorded in equity, until the disposal of the net investment. Upon disposal, it will be recorded as a gain, or loss, in the income statement.

In the example below, the exchange rates are given for January 1^st , assuming no movement on the accounts during the month.

Example:

Your foreign operation is financed by a $1 million inter company loan. It also has an account receivable of 800,000 Euros from another group company.

The exchange rates were:

January 1^st $1=30 Currency X 1Euro=35 Currency X

January31^st $1=22 Currency X. 1Euro=28 Currency X

The $ exchange gain = $1million * (30-22) = 8 million Currency X

(It is a gain as fewer Currency X are owed.)

The Euro loss = 800.000 Euros * (35-28) = 5,6 million Currency X.

(It is a loss as fewer Currency X will be received.)

The $ gain will go to equity, as it is part of the net investment financing the undertaking. The Euro loss will be recorded in the income statement, as it is a trading item.Where possible, all subsidiary year-ends must be at the same time as that of the parent undertaking. Under IFRS 10, the maximum permitted difference is 3 months.

Where there is a difference, the assets and liabilities of the foreign operation are translated at its balance sheet date.

Adjustment should be made for any significant differences created by any foreign operation having a different accounting date (see Annex for examples).

Example: Gains or losses from translation of a foreign subsidiary’s financial statements

Issue

Management should classify exchange differences arising on the translation of a foreign undertaking’s financial statements as equity, until the disposal of the net investment.

How should management recognise translation losses in respect of a foreign subsidiary’s financial statements where those losses result from a severe devaluation of the subsidiary’s measurement currency?

Background

A is a French parent undertaking with a subsidiary, B, in Africa. During the year the African country’s currency suffered a severe devaluation and undertaking A incurred material losses on the translation of B’s financial statements.

Solution

Management should recognise the loss on the translation of B’s financial statements in equity. The severity of the devaluation does not affect the treatment.

The exchange differences are not recognised as income or expense for the period because the changes in exchange rates have little, or no, direct effect on the present and future cash flows from operations of either the subsidiary or the parent.

Example: Exchange gains and losses segments

Undertaking D has operations in four business segments. The foreign exchange gains and losses arising from the revaluation of foreign currency receivable balances are recorded within administrative expenses and therefore within operating profit.

D presents segment information in accordance with IFRS 8, Operating Segments, including segment result.

Should segment result include the foreign exchange gains and losses arising from the revaluation of foreign currency receivables from that segment?

Yes. The foreign exchange gains and losses arise directly from the revaluation of the foreign currency receivables from each segment and should be included in segment result which is the difference between segment revenue and expense.

Segment expense is the directly attributable costs of each segment.

The foreign exchange gains and losses are directly attributable to the segments from which they arise.

Disposal of a Foreign Operation

On disposal of a foreign undertaking, all exchange differences deferred into equity crystallise and should be added to the gain, or loss, on disposal in the Income Statement.

Example:

A foreign subsidiary was sold for $500,000.

Its share capital was $75,000, its retained earnings $350,000 and exchange losses in equity were $80,000.

(Note: the total of these 3 figures will equal the net assets, assuming there is no other component of equity.) The gain on disposal: $500,000 – ($75,000+$350,000-$80,000) = $155,000.

The gain will be translated into functional currency at the spot rate on the transaction day.

In the case of a partial disposal, only the proportionate share of the net cumulative exchange difference should be included in the Income Statement.

Example:

20% of a foreign subsidiary was sold for $250,000.

Its share capital was $100,000, its retained earnings $1,500,000 and exchange gains in equity were $50,000.

The gain on disposal: $250,000 – 20%($100,000+$1,500,000+50,000) = $60,000

The gain will be translated into functional currency at the spot rate on the transaction day and included in the Income Statement.

Disposal or partial disposal of a foreign operation

In addition to the disposal of an undertaking’s entire interest in a foreign operation, the following are accounted for as disposals even if the undertaking retains an interest in the former subsidiary, associate or jointly controlled undertaking:

(i) the loss of control of a subsidiary that includes a foreign operation;

(ii) the loss of significant influence over an associate that includes a foreign operation; and

(iii) the loss of joint control over a jointly-controlled undertaking that includes a foreign operation.

On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non-controlling interests (minority interests) shall be derecognised, but shall not be reclassified to profit or loss.

On the partial disposal of a subsidiary that includes a foreign operation, the undertaking shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation.

As the undertaking’s share decreases, the share of the non-controlling (minority) interests increases, so an extra share of exchange differences is allocated to them.

In any other partial disposal of a foreign operation (not a subsidiary), the undertaking shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income.

A partial disposal of an undertaking’s interest in a foreign operation is any reduction in an undertaking’s ownership interest in a foreign operation, except those reductions that are accounted for as disposals.

An undertaking may dispose, or partially dispose, of its interest in a foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that undertaking.

The payment of a dividend is part of a disposal only when it constitutes a return of the investment, for example when the dividend is paid out of pre-acquisition profits. In the case of a partial disposal, only the proportionate share of the related accumulated exchange difference is included in the gain or loss.

A write-down of the carrying amount of a foreign operation, either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal.

Accordingly, no part of the deferred foreign exchange gain or loss is recognised in other comprehensive income is reclassified to profit or loss at the time of a write-down.

Hyperinflation Economies and Hedge Accounting

IAS 29 covers the accounting treatment of foreign undertakings located in hyperinflation economies. IAS 39 covers hedge accounting, including the hedging of foreign currencies. They are beyond the scope of this workbook, but are covered in the IAS 29 and IAS 39 workbooks.

Disclosure Requirements

An undertaking’s financial statements should disclose:

 the total net exchange differences included in the net profit for the period.

 net exchange differences classified as equity as a separate component of equity, and its opening and closing balances .

Where the presentation currency differs from the functional currency of the firm, the reason for this should be disclosed.

Any change in presentation currency, or functional currency, should be disclosed.

The method selected to translate goodwill and fair value adjustments arising on acquisition should be disclosed.

Material impacts of changes in foreign currency rates, after the balance sheet date, should be detailed, if financial statement users would otherwise be misled in making their evaluations and decisions.

Disclosure of an undertaking’s foreign currency risk management policy is encouraged.

Annex – Examples -Foreign operations with non-coterminous year ends

Undertaking F prepares its annual financial statements at 30 September. However, local regulations require one of its subsidiaries, undertaking G, to prepare its financial statements at 31 August.

Undertaking F uses G’s results for the 12 months to 31 August for consolidation purposes, rather than have a second set of results audited to 30 September.

The exchange rate between the pound (used for group reporting) and undertaking G’s local currency was £1:

LC15, 000 at 31 August 2006 and £1: LC18,000 at 30 September 2006. There were no significant transactions or other events at G during September 2006.

Undertaking G’s net assets at 31 August 2006 were LC234m.

What exchange rate should management use to translate the results of undertaking G?

Where a foreign operation has a different reporting date than the reporting undertaking, IFRS 10, allows the use of a different reporting date provided that the difference is no more than three months.

Also, adjustments must be made for the effects of any significant transactions, or other events that occur between the different dates. The assets and liabilities of the foreign operation should be translated at the exchange rate at the balance sheet date of the foreign operation, but adjustments should be made for significant changes in exchange rates up to the balance sheet date of the reporting undertaking.

Translating undertaking G’s balance sheet as at 31 August using the 31 August 2006 exchange rate results in net assets of undertaking G of £15,600. However, translating the balance sheet using the 30 September 2006 exchange rate results in the consolidation of a balance sheet with net assets of £13,600.

As the change in exchange rates between 31 August 2006 and 30 September 2006 is significant, undertaking F should use the exchange rate of 30 September 2006 for consolidation purposes.

Joint venture with a noncoterminous year-end

Investor F has an overseas joint venture (JV). F prepares financial statements to the year ending 30 April and the JV prepares financial statements to the year ending 31 December.

Can investor F use the JV.s December financial statements in preparing its own financial statements in April?

IAS 28 requires the use of financial statements drawn up to the same date as the investor unless it is impractical to do so. In particular IAS 28 prohibits a difference of more than three months between the year-end of the investor and of the associate.

Therefore, investor F should request the JV to prepare special-purpose financial statements drawn up to the year ending 30 April.