TABLE OF CONTENTS IAS 21 The Effects of Changes in Foreign Exchange Rates requires that entities choose the method to be used for translation so as to reflect the financial and other operational relationships between the holding company and the foreign enterprise. Mainly, this should involve the adoption of the closing rate method. The transactions are translated as if they were those of an independent entity whose cash flows are independent from those of the investor company. On the other hand, where the operations have a direct impact on those of the investing company, where the functioning of the entity is dependent on the investing company, where the currency used is mainly that of the investing company and where the major currency to which the entity is exposed is that of the investor company, then the 'integral operations' method should be adopted.
In deciding which method to adopt, there is no single factor upon which to make the decision. In the particular case of Hammer, there are inter-company transactions e.g. sale of goods but only on a limited basis. The management is organised locally, its prices are determined locally, and sales are to local companies. There seems to be only limited dependence on the parent company, thus it would appear that the closing rate method would be...
