This series of blogs describes how SAP Financial Consolidation, Starter Kit for IFRS has been configured to meet International Financial Reporting Standards (IFRS).
After an introductory blog and the two following ones dedicated to the presentation of financial statements, we will now look into the consolidation process starting with IAS 21.
IAS 21 sets out requirements for:
In this blog we will focus on the second point which is a key part of the consolidation process.
IAS 21 requires each individual entity to determine its functional currency. This is the currency of the primary economic environment in which it operates and may be different from the currency of the country in which the entity is located (referred to as local currency). For example, oil companies’ functional currency is often US dollar, as crude oil is routinely traded in US dollars around the word.
When accounting books are not maintained in the entity’s functional currency (because functional currency is different from local currency), financial statements must be first translated into the functional currency using the following principles (IAS21.34):
In the starter kit, translation from local currency to functional currency (when necessary) must be carried out before data are entered in the package. Indeed, the property “currency” of an entity, as declared in the table of entities, corresponds to its functional currency (and not to its local currency). Data entered in the packages are those in functional currency.
IAS 21 sets out the following principles as regards translation from functional currency to group currency:
These exchange differences result from:
The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation. When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognized as part of, non-controlling interests in the consolidated statement of financial position.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation should be treated as assets and liabilities of the foreign operation. Thus they should be expressed in the functional currency of the foreign operation and should be translated at the closing rate.
In the starter kit, the conversion process, that is part of the consolidation process, follows the principles set out by IAS 21.
As regards the use of an average rate, two methods are available:
This choice is made when the consolidation parameters (set of rules) are defined.
In the next blog we will focus on the consolidation process (IFRS 10, IFRS 11, IAS28 and IFRS3).
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