Reference no: EM132479523

case 1

In its 2011 annual report (p. 98) Wesfarmers notes that the functional currency and presentation currency of Wesfarmers Ltd and its Australian subsidiaries are the Australian dollar. In Note 32 it lists its overseas subsidiaries and their functional currencies. These include Bunnings (NZ) Ltd for which the functional currency is the New Zealand dollar (NZD), and Wesfarmers Kleenheat Elpiji Ltd for which the functional currency is the Bangladesh taka (BDT).

Required

Question 1: 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 Bangladesh. 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 profits are carried forward balances.

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 2

In its 2017 annual report (note 19) Wesfarmers lists its overseas subsidiaries and their functional currencies. These include Bunnings (NZ) Ltd for which the functional currency is the New Zealand dollar (NZD), and KAS Global Trading Pty Ltd for which the functional currency is the Hong Kong dollar (HK$).

Required

Question 1: What is meant by 'functional currency'? How is it determined?

Question 2: Discuss the translation process that will occur so that these subsidiaries can be included in the consolidated financial statements of Wesfarmers Ltd.