In: Accounting
Kuwait All Logistics (KAL) corporation, a Kuwait based multinational, borrowed euros 10,000,000 from Deutsche Bank at the beginning of the calendar year when the exchange rate was Eur 2.67 = KD 1. Before repaying this one year loan, KAL the KD depreciated to EUR 2.5 = KD 1. It also dicovers that its Berlin subsidiary has an exposed net asset position of EUR 15,000,000 which will produce a translation gain upon consolidation. What is the exchange gain or loss that will be reported in consolidated income if:
1. The Euro is the foreign operation's functional currency?
The loan restatement shall be as given below in the books of Holding company
Particulars | Euro | Rate | KD |
Initial booking | 10,000,000 | 2.67 | 3,745,318 |
Year end restatement | 10,000,000 | 2.5 | 4,000,000 |
Loss | (254,682) |
It is loss as loan is increasing.
If EURO is the functional currency of the subsidiary , then during consoliation the restatement difference shall be booked in foreign currency translation reserve. Hence the loss in income statement shall be only of the loan restatement which is 254,682
2. The Kuwaiti dinar is the foreign operation's functional currency?
If kuwaiti dinar is the functional currency of the subsidiary, then translation difference in subsidiary's euro transactions shall be recorded in the income statement of the subsidiary
The net asset restatement is as given below. It is a gain as asset is increasing
Particulars | Euro | Rate | KD |
Initial booking | 15,000,000 | 2.67 | 5,617,978 |
Year end restatement | 15,000,000 | 2.5 | 6,000,000 |
Gain | 382,022 |
So for consolidation apart from the above, the loan restatement also is to be included which will result in net gain of = 382022 - 254,682 = 127,341