Net investment in a foreign operation

Why does it matter in a group?

A loan to a foreign subsidiary that will not be repaid in the foreseeable future is, in substance, part of the parent’s net investment.¹ In the group accounts, exchange differences on it do not go to profit or loss. They go to other comprehensive income and build up in the translation reserveTranslation reserveThe part of group equity that holds exchange differences from translating a foreign subsidiary into the group's currency.Open the glossary entry. They are released only when the subsidiary is sold (see deconsolidationDeconsolidationRemoving a subsidiary from the group accounts from the date the parent loses control, with a gain or loss recognised on the disposal.Open the glossary entry).

A small example

Zenvara has a long-term dirham loan to Palmridge of AED 5,000,000 with no plan to repay. The closing rate moves from 0.2010 to 0.2040, a gain of GBP 15,000 (5,000,000 times 0.0030). Zenvara books it in its own profit and loss. The group moves it to other comprehensive income.