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Solutions Manual
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Solutions manual
to accompany
Company accounting
11th edition
by
Leo, Knapp, McGowan and Sweeting
Prepared by
Ken Leo
© John Wiley and Sons Australia, Ltd 2018

Chapter 8: Translation of financial statements into a presentation currency
Chapter 8: Translation of financial statements into a presentation currency

Review questions
1. What is the purpose of translating financial statements from one currency to

another? (LO1)
Para 3 of AASB 121/IAS 21 notes 2 areas of application:

• Translation of results and financial position of foreign operations for the purpose of
including those results in the consolidated financial statements of a group, or to allow
an investor to equity account for these results.
• Translation of an entity’s results and financial position into another currency for
presentation purposes
2. What is meant by ‘functional currency’? (LO2)
Para 8 of AASB 121/IAS 21 defines functional currency as “the currency of the primary
economic environment in which the entity operates”.
3. What is the rationale behind the choice of an exchange rate as an entity’s

functional currency? (LO2)
One of the objectives of the translation process is to provide information that is generally
compatible with the expected economic effects of an exchange rate change on an entity’s
cash flows and equity. A parent entity that has an investment in a foreign subsidiary has
assets under its control that are exposed to a change in the exchange rate. Capturing the
extent of this exposure should be reflected in the choice of exchange rate.
Where a subsidiary acts simply as a conduit for the parent’s transactions, then the
consolidation approach must treat the foreign currency statements of the subsidiary as
artefacts that must be translated into the currency of the parent.
Where the subsidiary is not just a conduit for the parent, but the latter is dependent on its own
economic environment then the choice of exchange rate must reflect the fact that the
functional currency is that of the subsidiary not the parent.
4. What guidelines are used to determine the functional currency of an entity? (LO2)
See paragraphs 9-12 of AASB 121/IAS 21.
© John Wiley and Sons Australia Ltd 2018 8.1

Solutions manual to accompany: Company accounting 11e by Leo et al.
5. How are statement of profit or loss and other comprehensive income items
translated from the local currency into the functional currency? (LO4)
Income and expenses: these are translated at the rate current at the date the transaction
occurred.
Dividends paid: these are translated at the rate current at the date of payment.
Dividends declared: these are translated at the rate current at the date of declaration
Transfers to/from reserves: for internal transfers, the rates applicable are those existing when
the amounts transferred were originally recognised in equity.
6. How are statement of financial position items translated from the local currency
into the functional currency? (LO4)
Para 23 of AASB 121/IAS 21:

• Foreign currency monetary items are translated using the closing rate.
• Non-monetary items that are measured in terms of historical cost in a foreign currency
are translated using the exchange rate at the date of the transaction.
• Non-monetary items that are measured at fair value in a foreign currency are
translated using the exchange rates at the date when the value was determined.
Assets: Classify as monetary or non-monetary. Translate monetary assets at the current rate
existing at end of reporting period. For non-monetary assets, use the rate current at the date at
which the recorded amount for the asset was entered into the accounts.
Liabilities: Classify liabilities into monetary and non-monetary. Use the same principles as
for assets.
Share capital: if on hand at acquisition, use the rate at acquisition date. If arising subsequent
to acquisition, use the rate at date of issue.
Other reserves: If on hand at acquisition date, use the rate at that date. For reserves created
by internal transfer, use the rate at date the amounts transferred were originally recognised in
equity.
Retained earnings: If on hand at acquisition date, use the rate at that date. Post-acquisition
profits are carried forward balances.
7. How are foreign exchange gains and losses calculated when translating from local
currency to functional currency? (LO4)
Exchange differences arise from translating the foreign operation’s monetary items at current
rates while the non-monetary items are translated using an historical rate. For non-monetary
items exchange differences arise only when they are sold or exchanged. Hence, exchange
differences are calculated by examining movements in the monetary items over the period.

Chapter 8: Disclosure: translation of financial statements
8. What is meant by ‘presentation currency’? (LO3)
Paragraph 8 of AASB 121/IAS 21 states that presentation currency is the currency in which
the financial statements are presented.
9. How are statement of profit and loss and other comprehensive income items
translated from functional currency to presentation currency? (LO5)
Income and expenses: These are translated at the rates current at the applicable transaction
dates.
Dividends paid: These are translated at the rates current when the dividends were paid.
Dividends declared: These are translated at the rates current when the dividends are declared.
10. How are statement of financial position items translated from functional currency
to presentation currency? (LO5)
Assets: Current rates at the end of the reporting period are used.
Liabilities: Current rates at the end of the reporting period are used.
Share capital: If on hand at acquisition date, the rate at acquisition date is used.
Other reserves: If on hand at acquisition date, use the rate at that date. For reserves created
by internal transfer, use the rate at date the amounts transferred were originally recognised in
equity.
Retained earnings: If on hand at acquisition date, use the rate at that date. Post-acquisition
11. What causes a foreign currency translation reserve to arise? (LO5)
A foreign currency translation reserve will arise when the financial statements are translated
into the presentation currency. It arises because income and expense items are translated at
dates of the transactions and not the closing rate, and in the case of a net investment in a
foreign operation where the opening net assets are translated at an exchange rate different
from the closing rate.
12. Why are gains/losses on translation taken to a foreign currency translation reserve
rather than to profit and loss for the period? (LO5)
According to paragraph 41 of AASB 121/IAS 21, these exchange differences have little or no
direct effect on the present and future cash flows from operations. Movements in the foreign
currency translation reserve are, however, shown as part of other comprehensive income for
the period.

13. The accounts listed below are for a wholly owned foreign subsidiary. In the space
provided indicate the exchange rate that would be used to translate the accounts
into Australian dollars. Use the following letters to indicate the appropriate
exchange rate:
H — historical exchange rate
C — current exchange rate at the end of the current period
A — average exchange rate for the current period.
(LO5)
A$ is Foreign currency is
functional currency functional currency
Cash C C
Prepaid expenses H C
Equipment H C
Goodwill H C
Accounts payable C C
Inventory – cost H C
Inventory – NRV C C
Capital H H
Sales A A
Depreciation expense H C
14. Discuss the differences in the translation process when translating from a local
currency to a functional currency compared with translating from a functional
currency to a presentation currency. (LO3)
Note para 23 for functional currency translation.
Note para 39 for presentation translation.
In relation to the income statement, there is little difference in that in both cases, most
revenues and expenses are translated at the average rate for the period. Differences will occur
in relation to depreciation.
In relation to share capital, no differences occur in translation.
In relation to the statement of financial position, there is no difference in translation of the

monetary items as current rates are always used. With non-monetary items, functional
currency translation for items measured in terms of historical cost are translated at historical
rates, while for presentation translation current rates are used. For non-monetary items
measured at fair value, current rates are always used.
Note that for a functional currency translation, exchange differences on monetary items are
recognised in profit or loss [para 28] while presentation translation results in exchange
differences being recognised in other comprehensive income [para 39].

Case studies
Case study 1
Financial reporting
Note 29(D)(ii) (p. 91) of the 2016 annual report of the Qantas Group provides the
following information:
Foreign Operations
The assets and liabilities of foreign operations, including goodwill and fair value
adjustments arising on acquisition, are translated into Australian Dollars at the
exchange rates at the reporting date. The income and expenses of foreign operations are
translated into Australian Dollars at the exchange rates at the date of the transactions.
Foreign currency differences are recognised in the Consolidated Statement of

Comprehensive Income and accumulated in the Foreign Currency Translation Reserve,
except to the extent that the translation difference is allocated to Non-controlling
Interests.
Required
Explain this note to a reader of the Qantas report.

This note is concerned with the financial statements of foreign entities controlled by Qantas.
These financial statements have probably been prepared in a currency other than the A$.
The note does not tell us anything about the functional currencies of the overseas operations
but is concerned with the translation of the foreign operations’ financial statements into A$s
so they can be included in the consolidated financial statements of the Qantas Group.
The method used to translate a functional currency into a presentation currency involves the
following translation process:
Assets: rates of exchange at balance date (current rates) are used.
Liabilities: rates of exchange at balance date (current rates) are used.
Share capital: if on hand at acquisition date, the rate at acquisition date is used.
Other reserves: if on hand at acquisition date, the rate at that date is used. For reserves
created by internal transfer, the rate at the date the amounts transferred were originally
recognised in equity is used.
Retained earnings: if on hand at acquisition date, the rate at that date is used. Post-acquisition
Revenues/expenses: rates approximating the foreign exchange rates at the dates of the
transactions are used – probably an average rate is used.
Under this translation method, exchange differences arise because the opening net assets are
translated at a rate different from the closing rate while revenues/expenses are translated at
rates different from the closing rate. These exchange differences are not recognised in profit
or loss. They are recognised in other comprehensive income and transferred to a foreign
currency translation reserve account.

Case study 2
Financial reporting
In its 2016 annual report, Wesfarmers notes that the functional currency and
presentation currency of Wesfarmers Ltd and its Australian subsidiaries are the
Australian dollar. In Note 19 it lists its overseas subsidiaries. These include Bunnings
(NZ) Ltd for which the functional currency is the New Zealand dollar (NZD), and
Auridam Botswana (Proprietary) Ltd for which the functional currency is the Pula
(BWP).
Required
Discuss the translation process that will occur so that these subsidiaries can be included
in the consolidated financial statements of Wesfarmers Ltd.

The foreign operations are being prepared in their functional currencies, generally the
currency of the country in which the country operates e.g. NZ or BWP.
In order to include the financial statements prepared in a functional currency other than the
A$, they must be translated into the presentation currency of A$. This process involves the
following translation process:
Assets: rates of exchange at balance date (current rates) are used.
Liabilities: rates of exchange at balance date (current rates) are used.
Share capital: if on hand at acquisition date, the rate at acquisition date is used.
Other reserves: if on hand at acquisition date, the rate at that date is used. For reserves
created by internal transfer, the rate at the date the amounts transferred were originally
recognised in equity is used.
Retained earnings: if on hand at acquisition date, the rate at that date is used. Post-acquisition
Revenues/expenses: rates approximating the foreign exchange rates at the dates of the
transactions are used – probably an average rate is used.
Under this translation method, exchange differences arise because the opening net assets are
translated at a rate different from the closing rate while revenues/expenses are translated at
rates different from the closing rate. These exchange differences are not recognised in profit
or loss. They are recognised in other comprehensive income and transferred to a foreign
currency translation reserve account.

Case study 3
Determination of functional currency
In relation to the following case situations, discuss the choice of a functional currency.
Case A
A Malaysian operation manufactures a product using Malaysian materials and labour.
Specialised equipment and senior operations staff are supplied by its Australian parent.
Reimbursement invoices for these services are denominated in the Malaysian ringgit.
The product is sold in the Malaysian market at a price, denominated in Malaysian
ringgit, which is determined by competition with similar locally produced products. The
foreign operation retains sufficient cash to meet wages and day-to-day operating costs
with the remainder being remitted to the Australian parent. The receipt of dividends
from the foreign operation is important to the parent’s cash management function.
Long-term financing is arranged and serviced by the parent.
Case B
A Korean operation is a wholly-owned subsidiary of an Australian company which
regards the operation as a long-term investment, and thus takes no part in the day to-
day decision making of the operation. The operation purchases parts from various non-
related Australian manufacturers for assembly by Korean labour. The finished product
is exported to a number of countries but Australia is the major market. Consequently,
sales prices are determined by competition within Australia.

In answering this question reference must be made to:

• The definition of functional currency in para 8, particularly noting the need to identify
the ‘primary economic environment’.
• The factors in pars 9 -11 if AASB 121/IAS 21, with para 9 containing the primary
indicators.
Case A
The choice for functional currency is the Australian $ or the Malaysian Ringgit – note:
• Malaysian materials and labour are used.
• Specialised equipment and senior op. staff are supplied by Australia but invoices
denominated in Ringgit.
• Selling prices are determined by local competition.
• Dividends are paid to Australian parent.
• Parent arranges long-term finance.
Relating this to AASB 121/IAS 21:

Para 9(a)(i) The ringgit influences sales prices, and is the currency in which goods and
services are settled.
Para 9(a)(ii) The ringgit is the currency whose competitive forces and
regulations mainly determine sales prices.
Para 9(b) The ringgit is the currency that mainly influences labour, material
and other costs.
Para 10 Financing is provided in A$.

Para 11 The activities are not an extension of the parent.
The cash flows from the activities of the foreign operation do affect
the cash flows of the reporting entity.
The primary indicators are those in para 9. Even though some of the indicators noted in para
11 relate to the A$, it is concluded here that the functional currency is the Malaysian ringgit.
Case B
Note:
• The operation is a long-term investment of the parent.
• Parent does not participate in daily management decisions of the subsidiary.
• Inputs are from Australia and based on $A.
• Labour costs are Korean currency.
• Sales revenue is denominated in A$.

Para 9(a)(i) A$ mainly influences sales prices.
Para 9(a)(ii) Australian competitive forces & regulations affect sales prices.
Para 9(b) A$ influences material inputs while Korean currency influences
labour costs.
Based on para 9, the functional currency is the Korean currency.

Case study 4
In relation to the following case situations, discuss whether you regard the reporting
entity as exposed to foreign exchange gains and losses in relation to the foreign entity.
Case A
A foreign operation extracts mineral ores that are shipped to Australia for processing at
the parent entity’s smelters. All senior personnel at the foreign operation are parent
entity employees. Monthly invoices for ore supplied to the parent are denominated in
US dollars. The parent entity pays these invoices with US dollars obtained by selling its
finished product to US customers, thus taking advantage of a natural hedge. Payments
to the foreign operation cover all running costs but long-term financing is provided by
the parent entity.
Case B
A foreign operation extracts a mineral product that it exports worldwide. The sales
price is subject to daily fluctuations. The Australian parent regards the operation as an
investment only but the extreme volatility of the foreign operation’s sales prices impacts
on the price of the parent’s shares on the Australian stock exchange because the
investment in the foreign operation is one of the parent’s significant assets.

Exposure to gains and losses relates to the potential losses an entity could incur in relation to
its holding of net assets in a foreign location if there were a change in the exchange rate.
Case A
• The foreign operation holds net assets namely extractive net assets offshore.
• Ore supplied is denominated in US$.
• Senior personnel probably paid in A$.
• Processing occurs in Australia.
• Customers are resident in US.
• Long-term financing is provided from Australia.
The functional currency is the US$. In relation to exposure to foreign exchange gains and
losses, by holding net assets offshore, the Australian parent is exposed to foreign exchange
gains and losses on the worth of that investment in A$. The exposure is lessened by the loan
to the subsidiary
Case B
The parent has an offshore investment. The parent is then exposed to foreign exchange gains
and losses in relation to the relative worth of the net assets held offshore. The worth of the
shares held by the parent will be affected by any change in the foreign exchange rate between
the two countries.
In general, regardless of whether the functional currency is the parent or the foreign
subsidiary, provided there are assets held offshore, the wealth of the parent is affected by
movements in exchange rates when it holds assets offshore. Where the functional currency is
that of the parent, accounting under AASB 121/IAS 21 does not report changes in the worth
of the non-monetary assets.

Case study 5
In relation to the following case situations, discuss which currency is the functional
currency of the foreign entity.
Case A
An Indonesian operation manufactures a product using Indonesian materials and
labour. Patented processes and senior operations staff are supplied by its Australian
parent. Reimbursement invoices for these services are denominated in Indonesian
rupiah. The product is sold in the Indonesian market at a price, denominated in rupiah,
that is determined by competition with similar locally produced products. The
Indonesian operation remits all revenue to the Australian parent, retaining only
sufficient cash to meet wages and day-to-day operating costs. The receipt of cash from
the Indonesian operation is important to the parent’s cash management function. Long-
term financing is arranged and serviced by the parent.
Case B
A New Zealand operation is a wholly-owned subsidiary of an Australian company. The
parent regards the operation as a long-term investment and all financial and
operational decisions are made by New Zealand management. The New Zealand
operation purchases parts from various non-related Australian manufacturers for
assembly in New Zealand. The finished product is exported to a number of countries
with Australia as the major market. Consequently, sales prices are determined by
competition within Australia.


• the definition of functional currency in para 8, particularly noting the need to
identify the ‘primary economic environment’.
• the factors in pars 9 -11 if AASB 121/IAS 21, with para 9 containing the primary
indicators.
Case A
The functional currency is either Indonesian rupiah or Australian dollars.
Note:
• Indonesian materials and labour are used.
• Processes & staff supplied from Australia but denominated in A$.
• Product is sold in rupiah determined by local competition.
• All profits remitted to Australia.
• Financing provided by parent.

Para 9(a) Rupiah influences sales prices.
Indonesian competitive forces & regulations affect sales prices.
Para 9(b) Some costs are denominated in A$ and others in rupiah.
Para 10(a) Financing is in A$.
Para 10(b) Operating activities usually retained in rupiah.
Para 11 Activities have a significant degree of autonomy.
Transactions not a high proportion of foreign operations activities.
Cash flows do affect Australian parent.
In general expect functional currency to be Indonesian rupiah, particularly given influence of

para 9.
Case B
The functional currency is either the NZ$ of the A$.
Note:
• Managed from NZ.
• Parts are supplied from Australia.
• Assembly is in NZ.
• Australia is major market.
• Sales prices determined by Australian market forces.

Para 9(a) A$ influences sales prices.
Australian competitive forces & regulations affect sales prices.
Para 9(b) Input costs are mixed A$ and NZ$.
Para 11 Not much autonomy for NZ operation.
Expect functional currency is the Australian dollar.

Case study 6
Foreign Ltd is a Queensland software developer that specialises in software that

controls the operations of open cut mining. To exploit opportunities in the US market,
the firm has established a wholly-owned subsidiary operating in Atlanta, Georgia. The
operations of the subsidiary (Opencut Inc.) essentially involve the marketing of software
initially developed in Australia but which is further developed by the US subsidiary to
suit the special requirements of particular US customers. Foreign Ltd does not charge
Opencut Inc. for the software successfully amended and marketed in the United States.
At this stage no dividends have been paid by Opencut Inc.; however, it is expected that
dividends will commence within 12 months. With respect to working capital, Opencut
Inc. has a ‘revolving credit’ agreement (overdraft facility) with the Bank of Georgia,
which has been guaranteed by the Australian parent.
Required
Discuss the process of translating the financial statements of Opencut Inc. for
consolidation with Foreign Ltd.
Step 1 is to determine the functional currency which is either the A$ of the US$.
Note:
• Product is developed in Australia.
• Further costs of development and marketing occur in the US.
• Sales are to US customers.
• Finance is provided in US dollars.

Para 9(a) The US$ influences sales prices.
The US is the country whose regulations and competitive forces
determine the sales price.
Para 9(b) The main input costs are in A$.
Para 10 Finances are in US$.
Receipts from operating activities are retained in US$.
Para 11 Not a great deal of autonomy.
The primary economic environment in which an entity operates is normally the one in which
it primarily generates and expends cash. In this example, the country in which the cash is
generated is the US, while the country in which it expends the most cash for developing the
product is Australia.
Given that further costs are incurred in the US (and proportion is unknown), and the fact that
financing is based on US$, the functional currency is probably the US dollar.

Case study 7
Victory Ltd is an Australian company with two overseas subsidiaries, one in Indonesia
and the other in South Korea. The Indonesian subsidiary has as its major activity the
distribution in Indonesia of Victory Ltd’s products. It has been agreed that the
subsidiary will, for a period of time, retain all profits in order to expand its distribution
network in Indonesia. In the past it has remitted most of its profits to the Australian
parent company.
The South Korean subsidiary has been established to manufacture a range of products
for the South-East Asian market. There is also an expectation that it could in the future
become the major manufacturing plant for Victory Ltd and provide a supply of
products for the Australian market.
Required
Based on the above, determine the functional currency of the foreign subsidiaries.
Explain your choice.


• The definition of functional currency in para 8, particularly noting the need to
identify the ‘primary economic environment’.
• The factors in pars 9 -11 if AASB 121/IAS 21, with para 9 containing the primary
indicators.
In relation to the Indonesian subsidiary:

• Products are supplied from Australia.
• Profits may be retained in Indonesia.
• Sales are made in Indonesia.
Note:
Para 9 The Indonesian currency influences sales prices and Indonesia is the
country whose competitive forces and regulations mainly determine
sales prices.
The Australian dollar mainly influences input costs.
Para 10 The Indonesian rupiah is the currency in which receipts from operating
activities are usually retained.
Para 11 The activities of the foreign operation are carried out as an extension of
the reporting entity.
It is concluded that the functional currency is the Australian dollar.
In relation to the South Korean subsidiary:

• Products are manufactured in South Korea.
• Sales are made in south-east Asia, maybe including Korea.
• Plant could supply products for sale in Australia in future.
Note:
Para 9: Not sufficient information is given to determine where major sales
occur, but indications are that sales are made in many Asian countries.
The South Korean currency influences input costs.
Para 10 Receipts from operating activities are kept in South Korean currency.
Para 11 Subsidiary is not just an extension of parent.
Functional currency is South Korean currency. It’s unlikely that this would change even if
eventually sales of products are made in Australia, as the latter would be only one of the
markets serviced by the subsidiary.

Practice questions
Question 8.1
Translation into functional currency
Sydney Ltd is a manufacturer of sheepskin products in Australia. It is a wholly-owned

subsidiary of a Hong Kong company, Wan Chai Ltd. The following assets are held by
Sydney Ltd at 30 June 2020.
Plant is depreciated on a straight-line basis, with zero residual values. All assets
acquired in the first half of a month are allocated a full month’s depreciation.
Inventories:
• At 1 July 2019, the inventories on hand of $25 000 was acquired during the last
month of the 2018–19 period.
• Inventories acquired during the period ended 30 June 2020 were acquired evenly
throughout the period. Total purchases of $420 000 were acquired during that
period.
• The inventories of $30 000 on hand at 30 June 2020 was acquired during June 2020.
Relevant exchange rates (quoted as A$1 = HK$) are as follows:
Required
(a) Assuming the functional currency for Sydney Ltd is the A$, calculate:
(i) the balances for the plant items and inventory in HK$ at 30 June 2020
(ii) the depreciation and cost of sales amounts in the statement of profit or loss
and other comprehensive income for 2019–20.
(b) Assuming the functional currency is the HK$, calculate:
(i) the balances for the plant items and inventory in HK$ at 30 June 2020
(ii) the depreciation and cost of sales amounts in the statement of profit or loss
and other comprehensive income for 2019–20.
(LO4)

(a) The functional currency for Sydney Ltd is the A$:
(i)
Plant
A$ Rate HK$ HK$
Tanner 40 000 7.8 312 000
Accumulated depreciation
(40 000 x 1/5 x 47/12) 31 333 7.8 244 400 67 600
Benches 20 000 7.8 156 000

(20 000 x 1/8 x 28/12) 5 833 7.8 45 500 110 500
Presses 70 000 7.8 546 000

(70 000 x 1/7 x ¾) 7 500 7.8 58 500 487 500
665 600
Inventory 30 000 7.8 234 000
(ii)
Depreciation
Tanner: 1/5 x 40 000 8 000 7.5 60 000

Benches: 1/8 x 20 000 2 500 7.5 18 750
Presses: 7 500 7.5 56 250 135 000
Cost of sales
Opening stock 25 000 7.2 180 000
Purchases 420 000 7.5 3 150 000
445 000 3 330 000
Closing stock 30 000 7.7 231 000
415 000 3 099 000

(b) The functional currency for Sydney Ltd is the HK$:
(i)
Plant
A$ Rate HK$ HK$
Tanner 40 000 5.4 216 000
(40 000 x 1/5 x 47/12) 31 333 5.4 169 200 46 800
Benches 20 000 5.8 116 000

(20 000 x 1/8 x 28/12) 5 833 5.8 33 832 82 168
Presses 70 000 6.2 434 000

(70 000 x 1/7 x ¾) 7 500 6.2 46 500 387 500
516 468
Inventory 30 000 7.7 231 000
(ii)
Depreciation
Tanner: 1/5 x 40 000 8 000 5.4 43 200

Benches: 1/8 x 20 000 2 500 5.8 14 500
Presses: 7 500 6.2 46 500 104 200
Cost of sales
Opening stock 25 000 7.2 180 000
Purchases 420 000 7.5 3 150 000
445 000 3 330 000
Closing stock 30 000 7.7 231 000
415 000 3 099 000

Question 8.2
Translation into presentation currency
Canberra Ltd, an Australian company, acquired all the issued shares of Washington Ltd, a
US company, on 1 January 2019. At this date, the net assets of Washington Ltd are shown
below.
The trial balance prepared by the US company Washington Ltd at 31 December 2019
contained the following information:
Additional information
1. No property, plant and equipment were acquired in the period ended 30 June 2019.
2. All sales and expenses were acquired evenly throughout the period. The inventories on
hand at the end of the year were acquired during December 2019.
3. Exchange rates were (A$1 = US$):

4. The functional currency for Washington Ltd is the US dollar.
(a) Prepare the financial statements of Washington Ltd at 31 December 2019 in the
presentation currency of Australian dollars.
(b) Verify the foreign currency translation adjustment.
(c) Discuss the differences that would occur if the functional currency of Washington Ltd
were the Australian dollar.
(d) If the functional currency were the Australian dollar, calculate the foreign currency
translation adjustment.
(LO5)
(a) Functional currency is the US$ - Presentation currency is the A$:
US$ rate A$
Sales 90 000 1/0.56 160 714
Cost of sales:
Opening stock 20 000 1/0.52 38 462
Purchases 55 000 1/0.56 98 214
75 000 136 676
Closing stock 45 000 1/0.58 77 586
Cost of sales 30 000 59 090
Gross profit 60 000 101 624
Expenses:
Depreciation 15 000 1/0.56 26 786
Other 30 000 1/0.56 53 571
45 000 80 357
Profit for the period 15 000 21 267
Retained earnings at 1/1/19 50 000 1/0.52 96 154
Retained earnings at 31/12/19 65 000 117 421
Share capital 100 000 1/0.52 192 308
Foreign currency translation reserve ______ (34 729)
Total equity 165 000 275 000
Property, plant & equipment 155 000 1/0.60 258 333
Accumulated depreciation 45 000 1/0.60 75 000
110 000 183 333
Accounts receivable 40 000 1/0.60 66 667
Inventory 45 000 1/0.60 75 000
Cash 12 000 1/0.60 20 000
207 000 345 000
Accounts payable 42 000 1/0.60 70 000
Net assets 165 000 275 000

(b) Verifying the foreign currency translation reserve:
Profit as translated 21 267

Profit x closing rate: 15 000 x 1/0.60 25 000
Translation gain 3 733
Opening net assets 150 000

Opening net assets x opening rate (150 000 x 1/0.52) 288 462
Opening net assets x closing rate (150 000 x 1/0.6) 250 000
Translation loss (38 462)
Total foreign currency translation reserve (34 729)

(c) Functional currency is the A$:
US$ rate A$
Sales 90 000 1/0.56 160 714
Cost of sales:
Opening stock 20 000 1/0.52 38 462
Purchases 55 000 1/0.56 98 214
75 000 136 676
Closing stock 45 000 1/0.58 77 586
Cost of sales 30 000 59 090
Expenses:
Depreciation 15 000 1/0.52 28 846
Other 30 000 1/0.56 53 571
45 000 82 417
Profit 15 000 19 207
Foreign currency translation loss (1 877)
Profit 17 330
Retained earnings at 1/1/19 50 000 1/0.52 96 154
Retained earnings at 31/12/19 65 000 113 484
Share capital 100 000 1/0.52 192 308
Total equity 165 000 305 792
Property, plant & equipment 155 000 1/0.52 298 077

Accumulated depreciation 45 000 1/0.52 86 538
110 000 211 539
Accounts receivable 40 000 1/0.60 66 667
Inventory 45 000 1/0.58 77 586
Cash 12 000 1/0.60 20 000
207 000 375 792
Accounts payable 42 000 1/0.60 70 000
Net assets 165 000 305 792
Differences in calculations when functional currency is A$ not US$:

• Closing stock / inventory: this is to be translated using the average rate for the period
during which it was purchased, that is, average rate for December 2019.
• Recognition of FCT gain or loss:
- When translating the financial reports into functional currency, this is to be
recognised in profit or loss as a FCT gain or loss.
- When translating the financial reports into presentation currency this is to be
recognised in other comprehensive income and shown as a FCT reserve in equity.

(d) Verification of translation adjustment:
US$ rate change gain/(loss)

Net monetary assets at 1 January 2019 5 000 (1/0.6 – 1/0.52) (1 282)
Increases: sales 90 000 (1/0.6 – 1/0.56) (10 714)
95 000 (11 996)
Decreases:
Purchases 55 000 (1/0.6 – 1/0.56) 6 548
Expenses 30 000 (1/0.6 – 1/0.56) 3 571
85 000 10 119
Net monetary assets at 31 December 2019 10 000 (1 877)

Question 8.3
Translation of financial statements into functional currency
Perth Ltd, a company incorporated in Australia, acquired all the issued shares of
Victoria Peak Ltd, a Hong Kong company, on 1 July 2019. The trial balance of Victoria
Peak Ltd at 30 June 2020 was:
1. Exchange rates based on equivalence to HK$1 were:
2. Inventories were acquired evenly throughout the year. The closing inventories of
HK$60 000 were acquired during the last quarter of the year.
3. Sales and other expenses occurred evenly throughout the year.
4. The Hong Kong tax rate is 20%.
5. The land on hand at the beginning of the year was sold on 8 October 2019. The land
on hand at the end of the year was acquired on 1 December 2019.

6. Movements in plant over the year ended 30 June 2020 were:
Depreciation on plant is measured at 20% per annum on cost. Where assets are
acquired during a month, a full month’s depreciation is charged.
7. The functional currency of the Victoria Peak Ltd is the Australian dollar.
Required
(a) Prepare the financial statements of Victoria Peak Ltd in Australian dollars at 30
June 2020.
(LO4)

(a) HK$ Rate A$

Sales 610 000 0.26 158 600
Cost of sales:
Opening inventory 60 000 0.20 12 000
Purchases 260 000 0.26 67 600
320 000 79 600
Closing inventory 60 000 0.24 14 400
260 000 65 200
Proceeds of land sold 250 000 0.25 62 500

Carrying amount of land sold 200 000 0.20 40 000
Gain on sale 50 000 22 500
400 000 115 900
Expenses:
Depreciation:
Full year: (600 000x0.2) 120 000 0.20 24 000
8/10: (200 000 x 0.2) x 9/12 30 000 0.25 7 500
2/4: (120 000 x 0.2) x 3/12 6 000 0.27 1 620
Other 134 000 0.26 34 840
290 000 67 960
110 000 47 940
FC translation gain/(loss) 31 140
Profit before income tax 79 080
Income tax expense 50 000 0.26 13 000
Profit 60 000 66 080
Retained earnings (op) 240 000 0.20 48 000
Retained earnings (cl) 300 000 114 080
Share capital 800 000 0.20 160 000
General reserve 100 000 0.20 20 000
1 200 000 294 080
Plant: Held for full year 600 000 0.20 120 000
Purchased 8/10 200 000 0.25 50 000
Purchased 2/4 120 000 0.27 32 400
Accumulated depreciation (184 000) 0.20 (36 800)
(120 000) 0.20 (24 000)
(30 000) 0.25 (7 500)
(6 000) 0.27 (1 620)
Land 400 000 0.28 112 000
Inventory 60 000 0.24 14 400
Cash 240 000 0.22 52 800
Accounts receivable 300 000 0.22 66 000
Total assets 1 580 000 377 680
Payables 160 000 0.22 35 200
Deferred tax liability 120 000 0.22 26 400
Current tax liability 20 000 0.22 4 400
Provisions 80 000 0.22 17 600
Total liabilities 380 000 0.22 83 600
Net assets 1 200 000 294 080

(b) Verification of translation adjustment:
Net monetary assets at 1/7/19 464 000 * 0.22 – 0.20 9 280

Increases:
Sales 610 000 0.22 – 0.26 (24 400)
Proceeds – land 250 000 0.22 – 0.25 (7 500)
1 324 000 (22 620)
Decreases:
Purchases 260 000 0.22 – 0.26 10 400
Land 400 000 0.22 – 0.28 24 000
Plant 200 000 0.22 – 0.25 6 000
120 000 0.22 – 0.27 6 000
Expenses 134 000 0.22 – 0.26 5 360
Tax 50 000 0.22 – 0.26 2 000
1 164 000 53 760
Net monetary assets at 30/6/20 160 000 31 140
The verification process requires the calculation of the difference between the closing rate and the
applied or opening rate.
* opening balance sheet was:
Capital 800 000

Retained earnings 240 000
General reserve 100 000
1 140 000
Plant 600 000
Accumulated depreciation **(184 000)
Land 200 000
Inventory 60 000
Net monetary assets 464 000
1 140 000
**
= Accumulated depreciation at the end of the financial period $(340 000)
Add back the Depreciation for the current financial period 156 000
= Accumulated depreciation at the beginning of the financial period $(184 000)

Question 8.4
On 1 July 2018, Adelaide Ltd, an Australian company, acquired shares in Mong Kok
Ltd, a company based in Hong Kong. At this date, the equity of Mong Kok Ltd was:
At 30 June 2019 and 2020 respectively, the retained earnings balances of Mong Kok
Ltd were HK$400 000 and HK$450 000 respectively. All transactions occurred evenly
throughout these years. The internal financial statements of the two companies at 30
June 2020 were as follows:

1. The dividend paid by Mong Kok Ltd was paid (and recognised as dividend revenue
of A$12 000 by Adelaide Ltd) on 1 May 2021.
2. Some relevant exchange rates are:
Required
Translate the financial statements of Mong Kok Ltd as at 30 June 2021 into the
presentation currency of Australian dollars, assuming that the functional currency is
the Hong Kong dollar. (LO5)

Translated accounts of Mong Kok Ltd as at 30 June 2021:
HK$ Exchange A$
Rate
Sales 595 000 0.85 505 750

Cost of sales 400 000 0.85 340 000
195 000 165 750
Expenses 100 000 0.85 85 000
95 000 80 750
Tax expense 20 000 0.85 17 000
Profit for the period 75 00 63 750
Retained earnings (1/7/20) 450 000 366 000
525 000 429 750
Dividend paid 25 000 0.8 20 000
Retained earnings (30/6/21) 500 000 409 750
Share capital 200 000 0.8 160 000
General reserve 100 000 0.8 80 000
FCTR _______ (25 750)
800 000 624 000
Current assets 250 000 0.78 195 000

Property, plant & equipment (net) 500 000 0.78 390 000
Patents and trademarks 150 000 0.78 117 000
900 000 702 000
Liabilities 100 000 0.78 78 000
800 000 624 000

Foreign Currency Translation Reserve (FCTR) at 30 June 2021:
2018-19
Opening net investment = HK$(200 000 + 100 000 + 300 000)

= HK$600 000
Profit for the period = R.E.30/6/19 HK$400 000 - R.E.1/7/15 HK$300 000
= HK$100 000
FCTR at 30 June 2019 = 600 000(0.85 - 0.8) + 100 000 (0.85 - 0.82)
= A$33 000 (credit)
2019-20

= HK$700 000
Profit for the period = R.E.30/6/20 HK$450 000 - R.E.30/6/19 HK$400 000
= HK$50 000
FCTR change = 700 000(0.9 - 0.85) + 50 000 (0.9 - 0.88)
= $36 000 (credit)
Hence at 30 June 2020, the FCTR has a credit balance of $69 000.
2020-21

= HK$750 000
Profit for the period = HK$75 000
Dividend = HK$25 000
FCTR change = 750 000(0.78 - 0.9) + 75 000 (0.78 - 0.85)
– 25 000 (0.78 - 0.8)
= $(94 750) (debit)
The balance of the FCTR at 30 June 2021 is then $(25 750).
Retained earnings balance at 1 July 2020:
Retained earnings (1/7/18) = HK$300 000 x 0.8

= A$240 000
Profit 2018-19 = HK$100 000 x 0.82
= A$82 000
Profit 2019-20 = HK$50 000 x 0.88
= A$44 000
Retained earnings (1/7/20) = A$366 000

Question 8.5
Lion Ltd is an international company resident in Singapore. It acquired the issued

shares of an Australian company, Brisbane Ltd, on 1 July 2019 for A$700 000.
At 30 June 2020, the following information was available about the two companies:
1. Sales, purchases and other expenses were incurred evenly throughout the period
ended 30 June 2020. The dividend paid by Brisbane Ltd was received by Lion Ltd
on 1 January 2020, while the dividend declared by Brisbane Ltd was announced on
30 June 2020.
2. Brisbane Ltd acquired A$100 000 additional new plant on 1 January 2020. Of the
depreciation charged in the period ended 30 June 2020, A$8000 related to the new
plant.
3. The rates of exchange between the Australian dollar and the Singapore dollar were
(expressed as A$1 = S$0.6):

4. The functional currency of Brisbane Ltd is the Australian dollar.
Required
(a) Translate the financial statements of Brisbane Ltd into Singapore dollars for
inclusion in the consolidated financial statements of Lion Ltd.
(LO5)

(a) Translation of subsidiary’s accounts into S$:
A$ Rate S$
Sales 310 000 0.65 201 500
Cost of sales 120 000 0.65 78 000
Gross profit 190 000 123 500
Depreciation – plant 40 000 0.65 26 000
Other expenses 10 000 0.65 6 500
50 000 32 500
Profit before tax 140 000 91 000
Tax expense 15 000 0.65 9 750
Profit 125 000 81 250
Retained earnings 1/7/19 170 000 0.6 102 000
295 000 183 250
Dividend paid 10 000 0.68 6 800
Dividend provided 20 000 0.7 14 000
30 000 20 800
Retained earnings 30/6/20 265 000 162 450
Share capital 350 000 0.6 210 000
Foreign currency translation
reserve -- 58 050
Provisions 30 000 0.7 21 000
Payables 40 000 0.7 28 000
685 000 479 500
Cash 30 000 0.7 21 000
Accounts receivable 115 000 0.7 80 500
Inventory 80 000 0.7 56 000
Buildings (net) 220 000 0.7 154 000
Plant 400 000 0.7 280 000
Accumulated depreciation (160 000) 0.7 (112 000)
685 000 479 500
(b) Verification of FCTR:
Opening net investment = A$520 000 (SC 350 000 + RE 170 000)
Opening net investment x opening rate = 520 000 x 0.6
= S$312 000
Opening net investment x closing rate = 520 000 x 0.7
= S$364 000
Exchange gain = S$52 000
Change in equity of subsidiary = A$125 000 – (10 000 + 20 000)

= A$95 000
Change in equity as translated = 81 250 – (6 800 + 14 000)
= S$60 450
Change in equity x closing rate = 95 000 x 0.7
= S$66 500
Exchange gain = S$6 050
Net FCTR = S$52 000 + S$6 050
= S$58 050

Question 8.6
Different functional currencies
On 1 July 2019, an Australian company, Toowoomba Ltd, acquired all the issued
capital of a Swedish company, Stockholm Ltd, for $997 400. At the date of acquisition,
the equity of Stockholm Ltd consisted of:
The internal financial statements of Stockholm Ltd at 30 June 2020 are shown below.

1. Exchange rates for the Swedish krona were as follows:
2. Stockholm Ltd acquired additional plant for K100 000 on 1 January 2019 by issuing
a note for K80 000 and paying the balance in cash.
3. Sales, purchases and other expenses were incurred evenly through the year.
4. Depreciation for the period in krona was as follows:

5. The inventories are valued on a FIFO basis. The opening stock was acquired when
the exchange rate was 0.54, and the closing stock was acquired during the last 4
months of the 2019–20 period.
6. Dividends of K50 000 were paid on 2 July 2019 and 1 January 2020.
7. The tax rate for Stockholm Ltd is 25%.
Required
(a) Translate the accounts of the foreign subsidiary, Stockholm Ltd, into Australian
dollars at 30 June 2020, assuming:
(i) the functional currency is the Swedish krona, and the presentation currency
is the Australian dollar
(ii) the functional currency is the Australian dollar, as is the presentation
currency.
(b) Verify the translation adjustments in requirement A.
(LO5 and LO6)

(a) Translation of accounts:
(i) Translation from functional currency (K) to presentation currency ($A):
K'000 K'000 K'000 $'000

Revenue 2 585 0.52 1 344
Cost of sales:
Opening stock 600 0.54 324
Purchases 1 800 0.52 936
2 400 1 260
Closing stock 580 0.51 296
Cost of sales 1 820 964
Gross profit 765 380
Depreciation 125 0.52 65
Other expenses 270 0.52 140
395 205
370 175
Income tax expense 200 0.52 104
Profit for the period 170 71
Retained earnings as at 1/7/19 635 0.54 343
805 414
Dividend paid 50 0.54
50 100 0.52 53
Retained earnings as at 30/6/20 705 361
Share capital 800 0.54 432
General reserve 200 0.54 108
Foreign Currency Translation
Reserve ____ (48)
$1 705 $853
Cash & receivables 500 0.5 250

Inventory 580 0.5 290
Land 300 0.5 150
Buildings 700 0.5 350
Accumulated depreciation (130) 0.5 (65)
Plant 900 0.5 450
2 520 1 260
Current liabilities 235 0.5 117

Notes 580 0.5 290
815 407
Net assets $1 705 $853

(ii) Proof of FCTR:
Change in net investment
Opening net assets = K1 635

Opening net assets x ending exchange rate = 1 635 x 0.5
= $818
Opening net assets x beginning exchange rate = 1 635 x 0.54
= $883
Translation loss = $(65)
Income statement items
Change in retained earnings = K705 - K635

= K70
Change x ending exchange rate = K70 x 0.5
= $35
Change as translated = $361 - $343
= $18
Translation gain = $17
Balance of FCTR = $(65) + $17

= $(48)

(b)
(i) Translation from local currency (K) to functional currency (A$A):
K'000 K'000 $'000

Revenue 2 585 0.52 1 344
Cost of sales:
Opening stock 600 0.54 324
Purchases 1 800 0.52 936
2 400 1 260
Closing stock 580 0.51 296
Cost of sales 1 820 964
Gross profit 765 380
Depreciation 115 0.54 62
10 0.52 5
Other expenses 270 0.52 140
395 207
370 173
Foreign Exchange Gain 15
188
Income tax expense 200 0.52 104
Profit for the period 170 84
Retained earnings as at 1/7/19 635 0.54 343
805 427
Dividend paid 50 0.54 27
50 0.52 26
100 53
Retained earnings as at 30/6/20 705 374
Share capital 800 0.54 432
General reserve 200 0.54 108
1 705 914
Cash & receivables 500 0.50 250

Inventory 580 0.51 296
Land 300 0.54 162
Buildings 700 0.54 378
Plant 800 0.54 432
100 0.52 52
(10) 0.52 (5)
2 520 1 322
Current liabilities 235 0.5 118

Notes 580 0.5 290
815 408
Net assets $1 705 $914

(ii) Proof of exchange gain:
K'000 K'000
Gain/(loss)
Net monetary assets at 1/7/19 *(430) (0.54 - 0.5) 17
Increases: Sales 2 585 (0.52 - 0.5) (52)
2155 (35)
Decreases:
Purchases 1 800 (0.52 - 0.5) 36
Other expenses 270 (0.52 - 0.5) 5
Income tax expense 200 (0.52 - 0.5) 4
Dividends 50 (0.54 - 0.5) 2
50 (0.52 - 0.5) 1
Acquisition of plant 100 (0.52 - 0.5) 2
$2 470 $50
Net monetary assets at 30/6/20 (315)
Foreign exchange gain 15

(Any difference is due to rounding)
*Opening statement of financial position:
Share capital 800 000

General reserve 200 000
Retained earnings 635 000
1 635 000
Inventory 600 000

Land 300 000
Building (net) 600 000
Plant (net) 565 000
Net monetary assets *430 000
1 635 000

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24. Ditto, ibid. pp. 201, 202.
25. Carlyle to his brother John, quoted in Mr. Froude’s Article.
26. Reminiscences, ii. 16, 11.
27. Quoted at p. 57 of Mr. William Howie Wylie’s excellent volume entitled
Carlyle: The Man and His Books.
28. Mr. Ireland’s copies of Letters, in Conway, p. 171.
29. Ibid. p. 180.
30. Quoted in Mr. Froude’s Article.
31. Quoted ibid.
32. The best account I ever had of Carlyle’s father was from an intelligent
elderly gentleman who, having retired from business, amused himself one session,
somewhere about or after 1857, by attending my class of English Literature in
University College, London. He was from Dumfriesshire originally, and had known
all the Carlyle family. He spoke more of Carlyle’s father than of Carlyle himself;
and his first words to me about him were these:—“He was a most extraordinary
man, Carlyle’s father: he said a thing, and it ran through the country.”——Carlyle
often talked to me of his father, and always in the tone of the memoir in his
Reminiscences, though I did not then know that he had any such memoir in
writing. “He was a far cleverer man, my father, than I am or ever shall be,” was one
of his phrases. He dwelt on what he thought a peculiar use by his father of the
Scottish word gar, meaning “to compel,” as when he was reluctant to do a thing
that must be done, and ended by saying he must “just gar himsel’ do it.” The
expression was not new to me, for it is to be heard farther north than Annandale;
but it seemed characteristic.—Of the strong and picturesque rhetoric of Carlyle’s
father I remember two examples, told me, I think, by Mrs. Carlyle. Once, when he
was going somewhere in a cart with his daughters on a rainy day, he was annoyed
by the drip-dripping into his neck from the whalebone point of one of the
umbrellas. “I would rather sit a’ nicht in my sark,” he said, “under a waterspout on
the tap of ——” [some mountain in the neighbourhood, the name of which I forget].
Once, when his son, of whom he had become proud, was at home in a vacation,
and a pious old neighbour-woman who had come in was exciting herself in a
theological controversy with the Divinity student on some point or other, he broke
out, “Thou auld crack-brained enthusiastic, dost thou think to argue wi’ our Tom?”
33. The substance of the paper must have been retained in Carlyle’s memory,
for he described to me once with extraordinary vividness his first sight of the Vale
of Yarrow as he struck it in one of his walks to Annandale. It was a beautiful day,
and he had come upon a height looking down upon the stony stream and its classic
valley. As he stood and gazed, with something in his mind of Wordsworth’s
salutation, “And this is Yarrow!”, up from the valley there came a peculiar,
repeated, rhythmical sound, as of clink—clink—clink, for which he could not
account. All was solitary and quiet otherwise, but still the clink—clink—clink rose
to his ear. At last, some way off, he saw a man with a cart standing in the bed of the
stream, and lifting stone after stone from it, which he threw into the cart. He could
then watch the gesture of each cast of a stone in among the rest, and note the
interval before the clink reached him.—The Yarrow songs were familiar to Carlyle;
and among the many scraps of old verse which he was fond of quoting or humming
to himself in his later years I observed this in particular:—
“But Minstrel Burn cannot assuage

His grief while life endureth,
To see the changes of this age,
Which fleeting time procureth;
For mony a place stands in hard case
Where joy was wont beforrow,
With Humes that dwelt on Leader braes,
And Scotts that dwelt on Yarrow.”
34. See the article Some Fifty Years Ago in Fraser’s Magazine for June 1879,
by Mr. Allingham, then Editor of the Magazine.
35. Dr. Hill Burton’s Reminiscences of Professor Wilson, published in Wilson’s
Life by Mrs. Gordon, ii. 25.
36. Peter Nimmo: A Rhapsody is duly registered among Carlyle’s anonymous
contributions to Fraser’s Magazine in Mr. Richard Herne Shepherd’s Bibliography
of Carlyle (1881). Should any one entertain doubts, even after such excellent
authority, a glance at the prose preface to the thing, signed O. Y. (“Oliver Yorke”),
in Fraser for February 1831, will remove them. After specifying Edinburgh
University as Peter’s local habitat, and estimating the enormously diffused
celebrity he has attained by his long persistence there, the preface proceeds: “The
world itself is interested in these matters: singular men are at all times worthy of
being described and sung; nay, strictly considered, there is nothing else worthy....
The Napoleon, the Nimmo, are mystic windows through which we glance deeper
into the hidden ways of Nature, and discern under a clearer figure the working of
that inscrutable Spirit of the Time, and Spirit of Time itself, who is by some
thought to be the Devil.” There may remain some little question as to the date of
the Rhapsody. That it was written by Carlyle in Annandale seems proved by the
phrase “in heaths and splashy weather” in the prologue. The date may have been
any time before 1831; but before 1821 seems the most likely.
37. Quoted by Mr. Froude in his Nineteenth Century article.
38. Mr. Ireland’s copies of early Carlyle Letters, in Mr. Conway’s Memoir, p.
185.
39. Ibid.
40. Mr. Ireland’s copies of Carlyle’s Letters, in Conway, pp. 192, 193.
41. Reminiscences, i. 208, 209.
42. Carlyle’s habit of smoking had begun in his boyhood, probably at
Ecclefechan before he came to Edinburgh University. His father, he told me, was a
moderate smoker, confining himself to about an ounce of tobacco a week, and so
thoughtfully as always to have a pipe ready for a friend out of that allowance.
Carlyle’s allowance, in his mature life, though he was very regular in his times and
seasons, must have been at least six times as much. Once, when the canister of
“free-smoking York River” on his mantelpiece was nearly empty, he told me not to
mind that, as he had “about half-a-stone more of the same upstairs.”—“Another
tobacco anecdote of Carlyle, which I had from the late G. H. Lewes, may be worth a
place here. One afternoon, when his own stock of “free-smoking York River” had
come to an end, and when he had set out to walk with a friend (Lewes himself, if I
recollect rightly), he stopped at a small tobacco-shop in Chelsea, facing the
Thames, and went in to procure some temporary supply. The friend went in with
him, and heard his dialogue with the shopkeeper. York River, having been asked
for, was duly produced; but, as it was not of the right sort, Carlyle, while making a
small purchase, informed the shopkeeper most particularly what the right sort was,
what was its name, and at what wholesale place in the city it might be ordered. “O,
we find that this suits our customers very well,” said the man. “That may be, Sir,”
said Carlyle; “but you will find it best in the long run always to deal in the
veracities.” The man’s impression must have been that the veracities were some
peculiar curly species of tobacco, hitherto unknown to him.
43. There does not seem to have been much direct intercourse between Wilson
and Carlyle after the meeting mentioned, though there were cordial exchanges of
regards between them, and some incidental compliments to Carlyle in Blackwood.
44. As the dates in this sentence will suggest, the last few paragraphs,
narrating the story of Goethe’s frustrated attempt to bring Scott and Carlyle
together, did not appear in the paper as originally published in Macmillan, but are
an insertion into the present reprint made possible by the information furnished
by the two recent publications named. I did, indeed, give an outline sketch of some
such affair as it had hung in my memory from talk either with Carlyle himself or
with his brother Dr. John Carlyle. But the sketch was hazy, and I now find that it
was inaccurate in some points.—Scott and Carlyle, I may here add, were once
together in the same room in Edinburgh in a semi-private way. The fact has been
communicated to me by Mr. David Douglas, the editor of Scott’s Journal, who had
it from Dr. David Aitken, already mentioned in this paper as an intimate friend of
Carlyle’s in the Comely Bank days. The scene of the meeting was the shop of Mr.
Tait, the publisher, then in an upper floor in Hanover Street. Carlyle and Mr.
Aitken, who had been walking in Princes Street, turned aside for a call at Mr.
Tait’s. While they were there and talking with Mr. Tait, Scott came in,—well known
to both by sight. “Mr. Tait, have you got a copy of Horace at hand? I want to make a
quotation,” were Scott’s words on entering. The book having been brought,—a
handsome quarto, Dr. Aitken remembered,—Scott sat down with it in his lap, and
began to turn over the leaves, Carlyle and Mr. Aitken standing a little way off
meanwhile, and Carlyle continuing his talk with Mr. Tait. Soon, as if attracted by
the voice or by something said, Scott began to look up, the volume still resting in
his lap. Several times he raised his eyes in the same fashion from the book to the
two strangers, or to the one who was talking. The expression, as Dr. Aitken
interpreted it in recollection, was as if he were saying to himself: “He is a
kenspeckle-looking chiel that; I wonder who he is.”—The date of this encounter I
do not know. If it was after the affair of the Goethe medals and the unanswered
letters (and that is not impossible if we suppose some occasion for a brief visit from
Craigenputtock to Edinburgh in 1829 or 1830), one can imagine with what
studious aloofness from his great senior Carlyle would comport himself in the
accidental interview.
45. From the Correspondence between Goethe and Carlyle, edited by Mr.
Charles Eliot Norton, we learn that Carlyle had, on the same day on which he wrote
this letter to Procter, written to Goethe soliciting a testimonial from him for the
same occasion. The testimonial was sent from Weimar, but not till the 14th of
March; and it came too late to be of use. A copy of the original German, with an
English translation, is printed in Mr. Norton’s volume. It is a document of five
pages, and perhaps the most unbusiness-like thing ever sent in the shape of a
testimonial on behalf of a candidate for a Scottish Professorship. It begins thus:
—“True conviction springs from the heart; the Soul, the real seat of the Conscience,
judges concerning what may be permitted and what may not be permitted far more
surely than the Understanding, which will see into and determine many things
without hitting the right mark. A well-disposed and self-observant man, wishing to
respect himself and to live at peace with hims}elf, and yet conscious of many an
imperfection perplexing his inner life, and grieved by many a fault compromising
him in the eyes of others, whereby he finds himself disturbed and opposed from
within and from without, will seek by all methods to free himself from such
impediments.” Then follow two paragraphs of continued remarks on the
intellectual or literary life in general; after which the testimonial becomes more
specific, thus:—“It may now without arrogance be asserted that German Literature
has effected much for humanity in this respect,—that a moral-psychological
tendency pervades it, introducing not ascetic timidity, but free culture in
accordance with nature, and a cheerful obedience to law; and therefore I have
observed with pleasure Mr. Carlyle’s admirably profound study of this Literature,
and I have noticed with sympathy how he has not only been able to discover the
beautiful and human, the good and great, in us, but has also contributed what was
his own, and has endowed us with the treasures of his genius. It must be granted
that he has a clear judgment as to our Æsthetic and Ethic writers, and, at the same
time, his own way of looking at them, which proves that he rests on an original
foundation and has the power to develop in himself the essentials of what is good
and beautiful. In this sense, I may well regard him as a man who would fill a Chair
of Moral Philosophy with single-heartedness, with purity, effect, and influence,
enlightening the youth entrusted to him as to their real duties, in accordance with
his disciplined thought, his natural gifts, and his acquired knowledge, aiming at
leading and urging their minds to moral activity, and thereby steadily guiding them
towards a religious completeness.”—When one imagines the probable effects on
the minds of the St. Andrews Principal and Professors of 1828 of such a testimonial
from the German sage, known to them so dimly, and perhaps in ways that made
them suspicious of him, one’s impression is that, if they had been thinking of
appointing Carlyle, the presentation of this testimonial would have been likely to
stop them. Never having been presented, it can have done no harm.
46. Review, in The Scots Observer (now The National Observer), 15th
December 1888, of “Letters from and to Charles Kirkpatrick Sharpe, Esq. Edited
by Alexander Allardyce. With a Memoir by the Rev. W. K. R. Bedford. In two
volumes. Edinburgh: William Blackwood and Sons.”
47. Lockhart, in his quotation from the Diary as here given, omitted a line or
two. The complete text may be now read in Mr. Douglas’s edition of the entire
Diary in 1890.
48. This is the “General Sharpe” from whom Carlyle’s father had a lease of his
farm of Mainhill from 1815 onwards, and from whom Carlyle himself rented the
house and grounds of Hoddam Hill for his one year’s experiment of farming-life in
1825–26. See the Reminiscences for the story of Carlyle’s quarrel, and then his
father’s also, with their landlord, caused mainly by his “arbitrary high-handed
temper, used to a rather prostrate style of obedience, and not finding it here.” Both
father and son gave up their leases in 1826, the father protesting “We can live
without Sharpe and the whole Sharpe creation,” and saying he would “rather go to
Jerusalem seeking farms, and die without finding one,” than remain under such a
landlord.
49. From The Scotsman of 18th November 1882; where it appeared as a
review of “The Book-Hunter, etc. By John Hill Burton, D.C.L., LL.D., Author of A
History of Scotland, The Scot Abroad, The Reign of Queen Anne, etc. A New
Edition: with a Memoir of the Author. William Blackwood & Sons, Edinburgh and
London.”
50. From Macmillan’s Magazine for February 1883. The main portion of the
paper was delivered as a lecture in the University of Edinburgh on Tuesday,
October 24, 1882; and there are reasons for retaining the familiarity of the lecture
form in the reprint.
51. From The Scotsman of 8th and 9th November 1889. This paper is
purposely placed last in the volume, as containing necessarily a recapitulation of
portions of the matter of some of the preceding.
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Catching a Marmot.
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Among the Orchards of Tyrol.
Melchior Ragetli; or, The Life of a Swiss Porter.
Swiss Athletic Sports.
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Hay Hauling on the Alpine Snow.
A Four Days’ Sleigh-Drive.
A Page of my Life.
Bacchus in Graubünden.
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© John Wiley and Sons Australia, Ltd 2018

Chapter 8: Translation of financial statements into a presentation currency

1. What is the purpose of translating financial statements from one currency to

Para 3 of AASB 121/IAS 21 notes 2 areas of application:

2. What is meant by ‘functional currency’? (LO2)

3. What is the rationale behind the choice of an exchange rate as an entity’s

See paragraphs 9-12 of AASB 121/IAS 21.

© John Wiley and Sons Australia Ltd 2018 8.1

Para 23 of AASB 121/IAS 21:

© John Wiley and Sons Australia Ltd 2018 8.2

8. What is meant by ‘presentation currency’? (LO3)

11. What causes a foreign currency translation reserve to arise? (LO5)

© John Wiley and Sons Australia Ltd 2018 8.3

Note para 23 for functional currency translation.

Note para 39 for presentation translation.

In relation to share capital, no differences occur in translation.

In relation to the statement of financial position, there is no difference in translation of the

© John Wiley and Sons Australia Ltd 2018 8.4

Foreign currency differences are recognised in the Consolidated Statement of

© John Wiley and Sons Australia Ltd 2018 8.5

Assets: rates of exchange at balance date (current rates) are used.

Liabilities: rates of exchange at balance date (current rates) are used.

© John Wiley and Sons Australia Ltd 2018 8.6

© John Wiley and Sons Australia Ltd 2018 8.7

Assets: rates of exchange at balance date (current rates) are used.

Liabilities: rates of exchange at balance date (current rates) are used.

© John Wiley and Sons Australia Ltd 2018 8.8

Determination of functional currency

© John Wiley and Sons Australia Ltd 2018 8.9

In answering this question reference must be made to:

Relating this to AASB 121/IAS 21:

Para 10 Financing is provided in A$.

Relating this to AASB 121/IAS 21:

Based on para 9, the functional currency is the Korean currency.

© John Wiley and Sons Australia Ltd 2018 8.10

Determination of functional currency

© John Wiley and Sons Australia Ltd 2018 8.11

© John Wiley and Sons Australia Ltd 2018 8.12

Determination of functional currency

© John Wiley and Sons Australia Ltd 2018 8.13

In answering this question reference must be made to:

The functional currency is either Indonesian rupiah or Australian dollars.

Relating this to AASB 121/IAS 21:

In general expect functional currency to be Indonesian rupiah, particularly given influence of

The functional currency is either the NZ$ of the A$.

Relating this to AASB 121/IAS 21:

Expect functional currency is the Australian dollar.

© John Wiley and Sons Australia Ltd 2018 8.14

Determination of functional currency

Foreign Ltd is a Queensland software developer that specialises in software that

Relating this to AASB 121/IAS 21:

© John Wiley and Sons Australia Ltd 2018 8.15

Determination of functional currency

© John Wiley and Sons Australia Ltd 2018 8.16

In answering this question reference must be made to:

In relation to the Indonesian subsidiary:

It is concluded that the functional currency is the Australian dollar.

In relation to the South Korean subsidiary:

© John Wiley and Sons Australia Ltd 2018 8.17

Translation into functional currency