Sydney Corporation, an Australian-based multinational, borrowed 10,000,000 euros from a German lender at the beginning of the calendar year when the exchange rate was EUR.60 = AUD1. Before repaying this one-year loan, Sydney Corporation learns that the Australian dollar had depreciated to EUR.55 = AUD1. It also discovers that its Frankfurt subsidiary has an exposed net asset position of EUR 30,000,000, which will produce a translation gain upon consolidation. What is the exchange gain or loss that will be reported in consolidated income if (a) the euro is the foreign operation's functional currency? (b) The Australian dollar is the foreign operation's functional currency?
Thank you for question.
(a) The euro is the foreign operation's functional currency: Parent and subsidiary do not have the same functional currency
In this case, the exchange gain upon consolidation of the subsidiary will be recorded as OCI not as P&L in the net income.
The solution explains how to calculate and present foreign exchange loss or gain depending on whether Parent and subsidiary have the same or different functional currency.