ᅞ A) ᅚ B) ᅞ C)
$1,771 and $2,361. $1,845 and$2,401. $1,845 and$2,361.
Explanation
Test ID: 7440447
Mu
lti
na
tio
na
l
O
p
era
tio
ns
Ques
tio
n #1
o
f 1
54
QuestionID: 462300ᅞ A)
ᅚ B) ᅞ C)
Ques
tio
n #2
o
f 1
54
QuestionID: 462354ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #3
o
f 1
54
QuestionID: 462458ᅚ A) ᅞ B) ᅞ C)
Which of thefollowing statementsdescribing the choice of thefunctional currency isleastaccurate? Thefunctional currency should be thesameas the parent'sreporting currency if thesubsidiary is:
highlyintegrated withthe parentwhere the localcurrency, prices, and some
costs are controlled or restricted. mostly independent from the parent.
highly integrated with the parent where the local currency, prices,andsome costsare
not controlled orrestricted.
Explanation
The preferredfunctional currency forsubsidiaries that are mostly independent of the parent is the local currency. For highly integratedsubsidiaries (regardless of local conditions), orforsubsidiaries operating in high-inflationenvironments, the parent's
reporting currency should beusedas thefunctional currency.
Which of thefollowing statementsregarding the translation ofaforeignsubsidiary into thereporting currency ismost accurate?
If the reportingcurrencyis the functionalcurrency, the temporalmethod is applied and exposure is equalto netmonetary assets.
A multinational firm with small liability balances generally has minimal foreign currency exposure on its balancesheet.
If thefunctional currency isequal to the local currency,exchange gainsand losses on translation will berecognized in the incomestatement.
Explanation
The choice offunctional currency is thedetermining factoras to which method offoreign currency translation isutilized. Therefore, when thereporting currency is thefunctional currency, the temporal method must beused.The choice offunctional currency is largely left to management'sdiscretion.
Ina hyperinflationary economy, translationunder the current rate method will mostlikelyresult inrelatively:
Ques
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Question ID: 462391ᅞ A) ᅞ B) ᅚ C)
Ques
tio
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Question ID: 462390ᅞ A) ᅚ B) ᅞ C)
Ques
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Question ID: 462355ᅚ A)
ᅞ B) ᅞ C)
PortintaInc,a U.S. based pharmaceutical company, has a UK based subsidiary,Medaze plc.The U.S. dollar has been appreciating relative to GBP over the past year. Using the current-rate method to translatea foreign subsidiary's financial statements to U.S. dollars will mostlikely have which of the following effects on the long-term debt to equity ratio relative to what theratio would have been without theeffects of translation?
The ratio will be lower.
Theratio will be higher. Theratio will be the same.
Explanation
Under the current rate method, both LTDand equity are translated at the current rate of exchange. Hence, since the same rate is applied in both thenumeratorand denominator, theratio will not change.
Note: Whenequity is broken out into separateaccounts, common stock is takenat the historical rate. When takenas a whole, equity should be translated at the current rate.In this case wearenot givenany information on the common stockamount, so we translateequity at the current rate.
HannCompany isa U.S. multinational firm with operations inseveral foreign countries. Hann hasa100 percent stake ina French
subsidiary.Theforeignsubsidiary's local currency hasappreciatedagainst the U.S.dollar over the latest financial statement reporting period.Inaddition, the French firm accountsfor inventoriesusing the FIFO inventory cost-flow assumption.Thenet profit marginas
computedunder the current rate method wouldmostlikely be:
lower than the same ratiocomputed under the temporalmethod.
either higher or lower than thesameratio computedunder the temporal method. higher than thesameratio computedunder the temporal method.
Explanation
The foreign currency gain or loss appears on the income statement under the temporal method. Hence, to makeany determinations regarding the movements of this ratio, weneed more informationregarding thenet monetary asset or liability positionas of both the beginning and ending balance sheet date.
Which of thefollowing statements isleastaccurateregarding theuse of the temporal methodforforeignexchangeaccounting?
Under the temporalmethod, the foreign exchange gain or loss is placed on the balance sheetin the equity section.
All nonmonetary assetsand liabilitiesare translatedat the historical rate ofexchange. All monetary assetsare translatedat the current rate ofexchange.
Explanation
Retained earnings = 2,000 Net income = 2,000
Ques
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Question ID: 462403ᅞ A)
ᅞ B) ᅚ C)
Ques
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Question ID: 462311ᅚ A) ᅞ B) ᅞ C)
Ques
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n #87
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Question ID: 462363Under the temporal method, the foreignexchange gain or loss is placed on theincomestatement.
Which of thefollowing statements concerning the translation ofasubsidiary'sfinancial statement and thesubsidiary'sratios isleast accurate?
The subsidiary's ratios in the localcurrencywill differ from ratios calculated after translation.
Thestatement of cash flows isnot affected by the choice of translation.
Ratios calculatedunder the current rate method will not differfrom those calculatedunder the temporal method.
Explanation
Ratios calculated under the current rate method will differ from those calculated under the temporal method.
A German company (reporting currency = Euro) owns a foreign subsidiary in the U.S.If theresults below arereported in local currency (USD),after translation what is theeffect of the change in theexchangerate onrevenues? Round to thenearest dollarand/or percent.
Y
e
a
r
S
al
e
s
$
per
1
E
u
r
o
av
g.
Exc
han
ge
Rat
e
2
00
1
$1
0
,
000
0
.
9
2
00
2
$1
0
,
000
0
.
8
The company shows a 12.5%growthin revenues in 2002. There isno change isrevenue growth between2001and2002. The company showsa 0.1% decline inrevenues in2002.
Explanation
Whilesales wereflat in terms of local currency,after translation thereportedrevenue increased12.5%.10,000/0.9 = 11,111; 10,000/0.8 = 12,500; 12,500/11,111 = 12.5% increasedue to exchangerateeffects.
ᅞ A)
ᅞ B)
ᅚ C)
Ques
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Question ID: 462380ᅚ A)
ᅞ B)
ᅞ C)
Ques
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ns #89-94
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If a firmoperates in a countryor environmentwhichis subjecttocumulative inflation of 100%or more over a three year period, that firmwill use the parent's currency as the functionalcurrency.
Self-contained, independent subsidiaries whose operationsare primarily located in the local market will use the local currency as thefunctional currency.
Thefunctional currency isdefinedas the primary currency of theeconomic environment in which the parent firm operates.
Explanation
The basisforusing the current rate method is when Functional Currency is NOT thesameas Parent's Presentation (reporting)Currency. The basisforusing the temporal method is when Functional Currency = Parent's PresentationCurrency.
Thefunctional currency isdefinedas the primary currency of theeconomic environment in which theforeignsubsidiary operates.
Gortal Inc,a U.S.company hasa wholly ownedsubsidiary, Fortina GmBh, based in Germany.The U.S.dollar has beenappreciating relative to the Euro over the past year.Theuse of the temporal method to translateaforeignsubsidiary'sfinancial statements to U.S.
dollars will mostlikely have which of thefollowing effects on thefixed-asset turnoverratio (S/FA)relative to what theratio would have been without theeffects of translationassuming no new fixedassets were purchased throughout the year?
The ratiowillbe lower. Theratio will be higher.
There will beno effect on theratio.
Explanation
Since thedollar hasappreciated, the local currency hasdepreciated,so each foreign currency unit bought moredollars in the past relative to the present. Fixedassetsareremeasuredat the historical rateandsalesareremeasuredat theaveragerateunder the temporal method. Since the historical rate is buying moredollarsrelative to theaveragerate, thedenominator isstaying thesame whereas the numerator is getting smaller.Thus, theratio is lower.
Assume that ScudCo. isa Swisssubsidiary of the U.S.firm Patriot,Inc.OnDecember31,2007 the$/SF exchangerate was 0.77. (Each Swiss Franc buys77 cents.)Assume that this is the historical rate,except asnoted below.One year later the Swiss Franc had
appreciated to 0.85 $/SF. ScudCo. paysno dividends.Theaverageexchangeratefor the year was 0.80 $/SF. Scud paysno taxes. Assume that inventory isaccountedforusing theLIFO inventory assumption, was bought andsoldevenly throughout the year,and that
COGS is translatedat theaverageratefor the year.
Scud Co.Int'l
BalanceSheet (in SF thousands)
Ques
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Question ID: 462431ᅞ A)
ᅚ B)
ᅞ C)
Ques
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Question ID: 462432ᅚ A)
ᅞ B)
ᅞ C)
Cash & A/R 400 600
Inventory 500 500
Net Fixed Assets
7
00
6
00
Total Assets 1,600 1,700
A
/P
1
00
200Long-term debt 200 100
Common Stock 1,300 1,300
Retained Earnings
0
1
00
Total Liabilities 1,600 1,700 IncomeStatement (in SF thousands)
December31,2008
I
n
SF
Sales 7,000
COGS (6,800)
Depreciation (100)
Remeasurement Gain/Loss
--Net Income 100
Assume that thefunctional currency is the U.S.dollar whenanswering thefollowing questions.
The level of cash on the2008 remeasured balancesheet would be:
$480. $510. $462.
Explanation
The basisforusing the current rate method is when Functional Currency is NOT thesameas Parent's Presentation (reporting)Currency. The basisforusing the temporal method is when Functional Currency = Parent's PresentationCurrency.
Since the U.S.dollar is thefunctional currency and thereporting currency, the temporal methodshould beused to remeasure the Swiss
Franc into U.S.dollars. With the temporal method monetary assets like cash and monetary liabilitiesareremeasuredat the current exchangerate.600SF × 0.85$/SF = $510. (Study Session6,LOS 21.e)
The level ofnet fixedassets on theremeasured2008 balancesheet would be:
$462. $480. $510.
Explanation
Ques
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Question ID: 462433ᅞ A)
ᅚ B)
ᅞ C)
Ques
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Question ID: 462434ᅚ A)
ᅞ B)
ᅞ C)
0.77$/SF = $462. (Study Session6,LOS 21.e)
Which of thefollowing ratios may be larger in the presentation currency versus the local currency when translatedunder the current rate method?
Netprofitmargin. Return onassets.
Current ratio.
Explanation
All pure incomestatement and balancesheet ratiosareunaffected by theapplication of the current rate method. What we mean by "pure" is that the components of theratio all comefrom the balancesheet, or the components of theratio all comefrom the incomestatement. Return onassets isa "mixedratio" becauseassets comefrom the balancesheet andare translatedat the current rateandnet income is
translatedat theaveragerate. Unless theexchangeratedoesn't changeduring the year, the two inputs will be translatedat different rates, and the local currency value of theratio will change when translated into thereporting currency.The otherratios will always be thesame using the current rate method. (Study Session6,LOS 21.e)
The level ofretainedearnings on theremeasured2008 balancesheet would be:
$101. $85. $305.
Explanation
To get this value, weneed to finish remeasuring our balancesheet at theappropriaterates.Theretainedearningsfigure will be what makes the balancesheet balance.
Sc
ud Co
.
I
nt'l
B
alan
ce
S
h
ee
t (in
SF
thousands)
Dec.31,2008 Remeasured$
Cash & A/R 600 × 0.85 = 510
Inventory 500 × 0.77 = 385
Net FixedAssets 600 × 0.77= 462
Total Assets 1,700 1,357
A/P 200 × 0.85 = 170
Long-term debt 100 × 0.85 = 85
Common Stock 1,300 × 0.77 = 1001
Retained Earnings 100 101
Total LiabilitiesandOwner's Equity 1,700 1,357
Ques
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Question ID: 462435ᅞ A)
ᅚ B)
ᅞ C)
Ques
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Question ID: 462436ᅞ A)
ᅞ B)
ᅚ C)
Ques
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Question ID: 462350ᅞ A)
ᅞ B)
The level ofsales on theremeasured incomestatement would be:
$5,390. $5,600. $5,950.
Explanation
Revenuesand SG&Ause theaverageexchangerate with both the temporal and current rate methods. 7000SF × 0.80$/SF = $5600
(Study Session6,LOS 21.e)
The translation gain or loss on the incomestatement would be:
$25. $0. $18.
Explanation
Weneed to complete ourremeasurement of the incomestatement. Since beginning retainedearningsfor the year were zero, weknow that net income on theremeasured income must beequal to ending retainedearnings.Theremeasurement gain or loss is the plug figure that causes this to be the case.
I
n
c
om
e
S
tat
e
m
e
nt (in
SF
thousands)
Dece
m
ber
31,
2008
Sales 7,000 × 0.80 = $5,600
COGS (6,800) × 0.80 = $5,440
Depreciation 100 × 0.77= = $77
Income beforeremeasurement
gain/loss = $83
Remeasurement gain = Plug = $18
Net Income $101
(Study Session6,LOS 21.e)
Which of thefollowing general statements ismostaccurate with respect to the current rate method? Revenues:
and operating expenses are translated atthe current rate.
ᅚ C)
Ques
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Question ID: 462394ᅞ A)
ᅞ B)
ᅚ C)
Ques
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n #97
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Question ID: 462362ᅞ A)
ᅞ B)
ᅚ C)
Ques
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and operating expensesare translatedat theaveragerate.
Explanation
Asa general rulefor the current rate method,all revenuesand operating expensesare translatedusing theaveragerate.
HannCompany isa U.S. multinational firm with operations inseveral foreign countries. Hann hasa100% stake ina French subsidiary. Theforeignsubsidiary's local currency hasappreciatedagainst the U.S.dollar over the latest financial statement reporting period.In addition, the French firm accountsfor inventoriesusing thefirst in,first out (FIFO) inventory cost-flow assumption.The gross profit marginas computedunder the current rate method wouldmostlikely be:
higher than the gross profitmargin as computed under the temporalmethod. equal to the gross profit marginas computedunder the temporal method.
lower than the gross profit marginas computedunder the temporal method.
Explanation
Theaveragerate isused to convert salesunder both the temporal methodand the current rate method. Hence, the only difference between the two computations is on cost of goodssold (COGS). Since thefirm uses FIFO, older materialsareflowing into COGS andan olderexchangerateapplies. Since in the past theforeign currency bought fewerdollars, the gross profit under the temporal method will be higher than that of the current rate method.It may help to 'think' that with the current rate method, youuse theaveragerateforCOGS, which makesCOGS higher because the currency hasappreciated.
DaveIverson,CFA, isanalyzing therecently releasedfinancial statement of Global Corp.,a large multinational manufacturing company with productionfacilitiesacross Europeand Southeast Asia.The company's choice offunctional currency isnot disclosed, but Iverson doesnotice that Global Corp.doesnot haveany cumulative translationadjustments (CTA) on its balancesheet. Which of thefollowing
statements ismostaccurate baseduponIverson's observation?
The temporalmethod of foreign currencytranslation is used for atleast some of its subsidiaries.
The current rate method offoreign currency translation isusedexclusively. The temporal method offoreign currency translation isusedexclusively.
Explanation
The choice offunctional currency is thedetermining factoras to which method offoreign currency translation isutilized.Ifno CTA appears on the balancesheet, then the parent currency must be thefunctional currency forall of the company'ssubsidiariesand only the temporal method isused.
2006 (in million Ringgit).
S
a
l
e
s
1,
000
Cost of goods sold
6
00
De
p
re
ci
a
tio
n
80
O
p
er
a
ti
n
g
e
xp
e
n
s
e
s
12
0
E
a
r
n
i
n
gs b
e
fo
re
t
a
x
e
s
2
00
T
a
x
e
s
6
0
N
e
t i
n
com
e
1
40
D
ivid
e
n
ds
2
0
2005
2006
C
a
sh
50
6
0
A
cco
un
ts
re
c
e
iv
a
bl
e
s
1
00
11
0
I
n
v
e
n
to
r
i
e
s
1
00
11
0
O
th
er
c
u
rre
n
t
a
ss
e
ts
1
00
11
0
G
r
oss PP&E
7
00
800
Le
ss
a
cc
u
m
u
l
a
t
e
d
d
e
p
re
ci
a
tio
n
7
0
1
50
N
e
t PP&E
63
0
6
50
O
th
er
fix
e
d
a
ss
e
ts
2
0
40
T
ot
a
l
a
ss
e
ts
1,
000
1,
080
A
cco
un
t p
a
y
a
bl
e
7
0
80
C
u
rre
n
t po
r
tio
n
of
LTD
1
00
1
00
Not
e
s p
a
y
a
bl
e
1
00
1
50
O
th
er
c
u
rre
n
t li
a
biliti
e
s
3
0
3
0
L
o
n
g-t
er
m d
e
bt
3
00
2
00
Commo
n
stoc
k
1
00
1
00
P
a
id i
n
c
a
pit
a
l
50
50
R
e
t
a
i
n
e
d
e
a
r
n
i
n
gs
2
50
37
0
The value of the Ringgit at various times over the past two years isasfollows:
Ques
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Question ID: 462424ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
n #99
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Question ID: 462425ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #100
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Question ID: 462426ᅞ A)
De
c
e
mb
er
31,
2
005
$
0
.
40
J
un
e
3
0
,
2
00
6
$
0
.
4
7
De
c
e
mb
er
31,
2
00
6 $
0
.
50
A
v
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a
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fo
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2
005
$
0
.3
9
A
v
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a
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fo
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2
00
6
$
0
.
45
The commonstockand long-term debt were originally issued in January of2005.Thefixedassetsandfirst inventory purchases were made inApril of2005.Additional fixedasset purchases were made in June2006.Inventory is measuredusing the FIFO method.It can be assumed that all of theending inventory wasacquired in June when the last major purchase was made.The operations of thesubsidiary are independent from the operations of the U.S. parent.Inflation over the past three years hasaveraged15% per year.
Theamount of2006 cost of goodssold in USD is:
(Note: ifneeded,use$0.40 as therate to convert 2005 ending inventory)
$300,000,000. $270,000,000. $262,800,000.
Explanation
The basisforusing the current rate method is when Functional Currency is NOT thesameas Parent's Presentation (reporting)Currency. The basisforusing the temporal method is when Functional Currency = Parent's PresentationCurrency.
Because the operationsare independent from the parent, the current rate method will beused.Cost of goodssoldshould beaccountedfor at theaverageratefor the past year.Theamount of cost of goodssold is 0.45 × 600,000,000 = $270,000,000. (Study Session6,LOS 21.e)
The value ofDecember31,2006, gross property, plant,andequipment reported in USD is:
$400,000,000. $304,000,000. $313,000,000.
Explanation
Because the operationsare independent from the parent, the current rate method will beused. Fixedassetsshould beaccountedforat the current rate.The value is 0.5 × 800,000,000 = $400,000,000. (Study Session6,LOS 21.e)
Theamount of2006depreciationexpense in USD is:
ᅞ B)
ᅚ C)
Ques
tio
n #101
o
f 154
Question ID: 462427ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #102
o
f 154
Question ID: 462428ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
n #103
o
f 154
Question ID: 462429ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
ns #104-109
o
f 154
$40,000,000.$36,000,000.
Explanation
Because the operationsare independent from the parent, the current rate method will beused.Depreciationshould beaccountedforat the averageratefor the past year.Theamount ofdepreciation is 0.45 × 80,000,000 = $36,000,000. (Study Session6,LOS 21.e)
The value ofDecember31,2006, inventory reported in USD is:
$55,000,000. $49,500,000. $51,700,000.
Explanation
Because the operationsare independent from the parent, the current rate method will beused.Inventory should beaccountedforat the current rate.The value is 0.50 × 110,000,000 = $55,000,000. (Study Session6,LOS 21.e)
The value ofall financing debt (notes payable, current portion of long-term debt,and long-term debt) onDecember31,2006,reported in USD is:
$202,500,000. $225,000,000. $171,000,000.
Explanation
Because the operationsare independent from the parent, the current rate method will beused.All debt is considereda monetary liability andshould beaccountedforat the current rate.The value is 0.50 × 450,000,000 = $225,000,000. (Study Session6,LOS 21.e)
The combined value of the commonstockand paid in capital onDecember31,2006,reported in USD is:
$75,000,000. $55,500,000. $63,000,000.
Explanation
ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #104
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Question ID: 462329DellaAirLines hasrecently acquiredAustralian Puddle Jumpers,Inc. (APJ),asmall airline located in Sydney.TheAustraliandollar has
been chosen by Dellaas thefunctional currency forAPJ.The balancesheet ofAPJ is given below as ofDec.31,2011 in U.S.dollars.
Assets Liabilities and Equity Cash $100 Accounts Payable (A/P) $90 Accounts Receivable (A/R) 120 Common Stock 360
Maintenance Supplies 90
Fixed Assets 140
Total Assets $450 Total Liabilities & Equity $450
APJ's incomestatement for the yearending Dec.31,2012 isexpressed inAustraliandollarsas:
Sales 3,500
Total Costs 2,900 Net Income 600
TheAustraliandollar hassteadily depreciatedagainst the U.S.dollar.At Dec.31,2011, theexchangerate was2.5 Australiandollars = $1 but at Dec.31,2012, theexchangerate haddeteriorated to 3Australiandollars = $1.
TheDec.31,2012Balance Sheet forAPJ is given inAustraliandollarsasfollows:
Assets Liabilities and Equity
Cash 441 A/P 210
A/R 330 Common Stock 720
Supplies 291 Retained Earnings 600
Fixed Assets 468
Total Assets 1,530 Total Liabilities & Equity 1,530
OnAPJ's2012 incomestatement, the level ofsales in U.S.dollars would beclosest to: $1,272.
$1,377.
$1,985.
Explanation
The basisforusing the current rate method is when Functional Currency is NOT thesameas Parent's Presentation (reporting)Currency. The basisforusing the temporal method is when Functional Currency = Parent's PresentationCurrency.
Since theAustraliandollar is thefunctional currency,use the current rate method.The items in the incomestatement are translatedat the averageexchangerate.Theaveragerate is (2.5 + 3) / 2 = 2.75 Australiandollars per = US$.
IncomeStatement(in$)
Sales (3,500 / 2.75) $1,272
Ques
tio
n #105
o
f 154
Question ID: 462330ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #106
o
f 154
Question ID: 462331ᅞ A)
ᅞ B)
ᅚ C)
Ques
tio
n #107
o
f 154
Question ID: 462332ᅚ A)
ᅞ B)
ᅞ C) (LOS 21.d)
OnAPJ's2012 incomestatement, the level ofnet income in U.S.dollars would beclosest to:
$217. $242. $229.
Explanation
Since weareusing the current rate method, the items in the incomestatement are translatedat theaverageexchangerate.Theaverage rate is (2.5 + 3) / 2 = 2.75 Australiandollars per$1.
IncomeStatement(in$)
Sales (3,500 / 2.75) $1,272
Costs (2,900 / 2.75) $1,055 Net Income $217
(LOS 21.d)
OnAPJ's2012 balancesheet, the level ofaccountsreceivable is U.S.dollars would beclosest to:
$132. $330. $110.
Explanation
Since weareusing the current rate method,all balancesheet accountsare translatedat the current exchangerate,except for the commonstockaccount, which is translatedat the historical rate.
A/R: (330 / 3) = 110
(LOS 21.d)
ForAPJ, the conversion to US$ ismostlikely to result in:
cumulative translation adjustmentloss cumulative translationadjustment gain. remeasurement gain.
Explanation
Ques
tio
n #108
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f 154
Question ID: 462333ᅞ A)
ᅞ B)
ᅚ C)
Ques
tio
n #109
o
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Question ID: 462334ᅞ A)
ᅞ B)
ᅚ C)
Total assets A$1,530 / (3.00 A$/US$) = US$510 Total liabilities A$210 / (3.00 A$/US$) = US$70 Net asset = US$440
Because thefunctional currency is the local currency, the current rate method isused. When we haveanet asset balancesheet
exposure,a weakening foreign currency will result inanegative translationadjustment.AJP'snet asset position will result ina cumulative transactionadjustment lossas theforeign currency, theA$, isdepreciating.
Exposure ForeignCurrency
Current rate method: Appreciating Depreciating
Net assets Gain Loss
Net liabilities Loss Gain
(LOS 21.d)
If thefunctional currency is thereporting currency, theexposureand theforeign currency movementsaremostlikely to result ina:
remeasurementgain.
cumulative translationadjustment loss. remeasurement loss.
Explanation
APJ hasanet monetary asset exposure:
Total monetary assets:Cash + A/R andMaintenancesuppliesA$1,062 / (3.00 A$/US$) = US$354 Total monetary liabilities:A$210 / (3.00 A$/US$) = US$70
Net monetary asset = US$284
Because thefunctional currency is thereporting currency, the temporal method isusedand this means there isremeasurement - a loss as theforeign currency, theA$, isdepreciating.
Exposure ForeignCurrency Temporal method: Appreciating Depreciating Net monetary assets Gain Loss
Net monetary liabilities Loss Gain
(LOS 21.d)
The cumulative translationadjustment (CTA) isclosestto:
a gain of US$440. a loss of US$135. a loss of US$65.
Explanation
Ques
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Question ID: 462360ᅞ A)
ᅞ B)
ᅚ C)
Ques
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Question ID: 462359ᅞ A)
ᅚ B)
ᅞ C)
Balance Sheet 2012 (A$) Rate (A$/US$) 2012 (US$)
Cash 441 3.00 $147
A/R 330 3.00 $110
Maintenance Supplies 291 3.00 $97
Current assets 1062 $354
Net Fixed Assets 468 3.00 $156
Total Assets 1,530 $510
Accounts payable (A/P) 210 3.00 $70
Common Stock 720 2.50 $288
Retained Earnings 600 from I/S $217
CTA ($65)
Total equities 1,320 $440
Total Liabilitiesand equity 1,530 $510
Income Statment 2012
Sales 3,500 2.75 $1,272
Total costs −2,900 2.75 $(1,055)
Net income $217
(LOS 21.f)
Under the current rate method, commonstock is translated by using the:
presentvalue of weighted average rate. exchangerateas of the balancesheet date. rate that existed when theequity was issued.
Explanation
The historical rate isused.
At what exchangeratearerevenuesandaccountsreceivable translatedunder the current rate method? Revenues Accounts receivable
Average rate Historical rate
Average rate Current rate
Current rate Current rate
Ques
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Question ID: 462367ᅚ A)
ᅞ B)
ᅞ C)
Ques
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ns #113-118
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Under the current rate method,revenuesare translatedat theaveragerate; accountsreceivableare translatedat the current rate.
An important distinction between the temporal methodand the current rate method is that:
the current rate method results in an adjustmenttothe equity accounton the balance sheet. The temporalmethod results in a gain or loss appearingon the income statement.
monetary assetsand liabilitiesareremeasured (temporal method)at historical rates but translated (current rate method)at current rates.
depreciationand cost of goodssold (COGS)areafunction of the current rateunder translation (current rate method), but afunction of theaveragerateunderremeasurement (temporal method).
Explanation
The current rate methodresults inanadjustment to theequity account on the balancesheet.The temporal methodresults ina gain or lossappearing on the incomestatement.DepreciationandCOGS areafunction of theaveragerateunder the current rate method, but a function of the historical rateunder the temporal method.Monetary assetsand liabilitiesareuse the current ratesunder both methods.
Geocorp isa global corporation with operations in North America,Asia,and Europe.Its primary business is marketing industrial machinery for the construction industry. Geocorp hasregional headquarters located in New York,Tokyo,and Paris.All North American and U.S operationsreport to itsregional and world headquarters located in New York, whileall Asian operationsreport to Tokyo,andall European operationsreport to Paris.
Thefollowing information isrelevant to Geocorp'ssubsidiaries:
Geocorp hasaCanadiansubsidiary that reports itsresults inCanadiandollars (CAD).TheCAD is thefunctional currency. All domestic U.S. operationsreport theirresults in U.S.dollars (USD).
All world-wide operationsarereported in USD.
Geocorp'sAsian operationsreport theirresults in Japanese yen (JPY).The JPY is thefunctional currency.
Geocorp hasaChinesesubsidiary that reports itsresults inChinese yuanrenminbi (CNY).The USD is thefunctional currency. Geocorp's European headquarters (in Paris) operationsreport theirresults ineuros (EUR).The EUR is thefunctional currency. Geocorp hasaBritish subsidiary that reports itsresults inBritish pounds (GBP).The USD is thefunctional currency. Thefollowing table isasummary ofselectedfinancial resultsfrom Geocorp'sforeign operations:
A
ll
valu
e
s
a
re
in
millions
C
A
D
JPY C
N
Y G
B
P
E
UR
R
e
v
e
nu
e
s
50 5
,
000
2
50
1
50
7
00
Cost of goods sold (C
O
GS)
2
0
2,7
00
11
0
1
00 480
G
r
oss p
r
ofit
3
0
2,3
00
1
40
50
22
0
Ques
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n #113
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Question ID: 462445ᅞ A)
ᅞ B)
ᅚ C)
Ques
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n #114
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Question ID: 462446ᅞ A)
E
BIT
12 1,3
00 88
21
1
0
C
a
sh
3
5 4
,2
00
13
0
1
0
2
400
A
cco
un
ts
re
c
e
iv
a
bl
e
12 1,
400 55
45
17
0
I
n
v
e
n
to
r
y
2
0
3,
900
13
5
123 3
00
Fix
e
d
a
ss
e
ts
62 7,6
80
1
88
37
0 450
A
cco
un
ts p
a
y
a
bl
e
27 3,3
00
76
6
8
3
50
L
o
n
g-t
er
m d
e
bt
7
0 8
,
450
2
90
32
0 550
Commo
n
stoc
k
1
0
2,
000
1
50
50
3
50
Thefollowing exchangeratesapply (USD perforeign currency unit):
Cu
rre
n
cy H
isto
r
i
c
al
Rat
e
A
v
er
a
ge
Rat
e Dece
m
ber
31,
2002
C
AD
US
D
0
.7
0
13
US
D
0
.6
80
3
US
D
0
.6
59
2
JPY
US
D
0
.
0094
US
D
0
.
0088
US
D
0
.
008
2
CNY
US
D
0
.1
0
1
0
US
D
0
.11
09
US
D
0
.12
08
EUR
US
D
0
.
980
1
US
D
1.
0
31
8
US
D
1.
08
3
4
G
B
P
US
D
1.
480
3
US
D
1.
550
6
US
D
1.62
09
With respect to theCanadiansubsidiary, what methodshould beused to value itsrevenues, what is theappropriateexchangerate,and
what is the translated value (in USD)?
Currentmethod, current rate, USD 33.0million. Temporal method,averagerate, USD34.0 million.
Current method,averagerate, USD34.0 million.
Explanation
The basisforusing the current rate method is when Functional Currency is NOT thesameas Parent's Presentation (reporting)Currency. The basisforusing the temporal method is when Functional Currency = Parent's PresentationCurrency.
Self-contained, independent subsidiariesreporting theirresults in the local currency that isalso thefunctional currency use the current method. Revenuesunder the current methodare translatedusing theaveragerate. Hence, 50 × 0.6803 = USD34.0 million. (Study Session6,LOS 21.e)
With respect to the Japanesesubsidiary, what methodshould beused to value itsaccountsreceivable, what is theappropriateexchange rate,and what is the translated value (in USD)?
ᅞ B)
ᅚ C)
Ques
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Question ID: 462447ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #116
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Question ID: 462448ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #117
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Question ID: 462449ᅞ A)
ᅞ B)
ᅚ C)
Current method,averagerate, USD12.3 million.
Current method, current rate, USD11.5 million.
Explanation
Self-contained, independent subsidiariesreporting theirresults in the local currency that isalso thefunctional currency use the current method.Assetsunder the current methodare translatedusing the current rate. Hence,1400 × 0.0082 = USD11.5 million. (Study Session 6,LOS 21.e)
With respect to the European HQsubsidiary, what methodshould beused to value its SG&Aexpenses, what is theappropriateexchange rate,and what is the translated value (USD)?
Currentmethod, average rate, USD 206.4million.
Current method, current rate, USD216.7 million. Temporal method,averagerate, USD206.4 million.
Explanation
Self-contained, independent subsidiariesreporting theirresults in the local currency that isalso thefunctional currency use the current method. Expensesunder the current methodare translatedusing theaveragerate. Hence,200 × 1.0318 = USD206.4 million. (Study Session6,LOS 21.e)
With respect to theBritish subsidiary, what methodshould beused to value itsfixedassets, what is theappropriateexchangerate,and
what is the translated value (USD)?
Temporalmethod, historical rate, USD 547.7 million.
Current method, current rate, USD 599.7 million.
Current method, historical rate, USD 547.7 million.
Explanation
Self-contained, independent subsidiariesreporting theirresults in the local currency that isNOT thefunctional currency use the temporal method. Fixedassetsunder the temporal methodare translatedusing the historical rate. Hence,370 × 1.4803 = USD 547.7 million. (Study Session6,LOS 21.e)
With respect to theChinesesubsidiary, what methodshould beused to value its long term debt, what is theappropriateexchangerate, and what is the translated value (in USD)?
Temporalmethod, historical rate, USD 29.3 million.
Current method, current rate, USD35.0 million. Temporal method, current rate, USD35.0 million.
Explanation
Ques
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Question ID: 462450ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
n #119
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Question ID: 462462ᅞ A)
ᅚ B)
ᅞ C)
Ques
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n #120
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Question ID: 462358ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
ns #121-126
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method.Long-term debt under the temporal method is considereda monetary liability and is translatedusing the current rate. Hence,290 × 0.1208 = USD35.0 million. (Study Session6,LOS 21.e)
Which of thefollowing statements ismostaccurate with respect to accounting for inventory and cost of goodssold (COGS)using last-in first out (LIFO)under the temporal method?
Inventoryis translated atthe current rate while COGSis translated athistorical rates. Inventory is translatedat historical rates,andCOGS is translatedat historical rates. Inventory is translatedat historical rates,andCOGS is translatedat the current rate.
Explanation
Ifusing LIFO,unitssoldduring the yearare the ones purchasedduring the year. Under the temporal method,COGS and inventory would
be translatedat historical rates. (Study Session6,LOS 21.d)
Inreality, what bestdescribes thereal value ofnon-monetary assetsand liabilities ina hyperinflationary environment?
All non-monetary accounts are re-measured atthe current rate.
Typically not affected because their local currency-denominated values increase to offset the impact of inflation.
Typically not affected because their local currency-denominated valuesdecrease to offset the impact of inflation.
Explanation
Typically not affected because their local currency-denominated values increase to offset the impact of inflation (i.e.,real estate values
typically rise with inflation).
Which of thefollowing general statements isCORRECT with respect to the temporal method? Revenuesand operating expenses
(excluding COGS)are translatedat the:
historical rate. averagerate. current rate.
Explanation
Ques
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Question ID: 462336 South SeasInc,asubsidiary of Seven SeasInc.,reported its most recent performance in its local currency (LC) which is thefunctional currency.Thereporting currency of Seven Seas is the U.S.dollar (USD). South Seasalso paidadividend of16,000LCat yearend,at which time theexchangerate was2.00 LC/USD.Last year, Seven Seasreported balancesheet retainedearnings of 90,000 USDfor itsSouth Seassubsidiary.
Rates LC/US$
Current rate 2.00
Average rate 2.20
Historical rate 2.50 Historical rate for COGS 2.30 Historical rate for depreciation 2.10 Historical rate for ending inventory 2.30 Historical rate for fixedassets 2.10
LC
Revenues 520,000
Cost of Goods Sold (COGS) 225,000
SG&A 100,000
Depreciation 80,000
Income Taxes 46,000
Net Income 69,000
The balancesheet for South Seas is given below.
LC
Cash 25,000
Accounts Receivable 30,000
Inventory 35,000
Net Fixed Assets 500,000
Total Assets 590,000
Accounts Payable 20,000 Long term debt 100,000
Common Stock 250,000 Retained Earnings 220,000
Total Liabilities & Equity 590,000
ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
n #122
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Question ID: 472481ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #123
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Question ID: 46233834,500USD. 31,400 USD. 27,600 USD.
Explanation
The current rate method isused when the Functional Currency is NOT thesameas the Parent's Presentation (reporting)Currency.The temporal method isused when the Functional Currency = the Parent's PresentationCurrency.
L
C
Conv
er
sion
U
SD
R
e
v
e
nu
e
s
5
2
0
,
000
/
2.2
0
236,36
4
a
v
er
a
g
e
r
a
t
e
C
O
GS
22
5
,
000
/
2.2
0
1
0
2,273
a
v
er
a
g
e
r
a
t
e
SG&
A
1
00
,
000
/
2.2
0
45
,
455
a
v
er
a
g
e
r
a
t
e
De
p
re
ci
a
tio
n
80
,
000
/
2.2
0
36,36
4
a
v
er
a
g
e
r
a
t
e
I
n
com
e
T
a
x
e
s
4
6,
000
/
2.2
0
2
0
,
909
a
v
er
a
g
e
r
a
t
e
N
e
t
I
n
com
e
6
9
,
000
31,36
4
(LOS 21.d)
Theamount ofretainedearnings that Seven Seas will report on its balancesheet for its South Seassubsidiary isclosest to:
113,364USD. 121,364 USD. 129,364 USD.
Explanation
Dividendsare translatedat therate2LC/USD.Therefore, the16,000 LCdividend isequivalent to 16,000LC / 2 = 8,000 USD. Net income lessdividendsequals the current periodretainedearnings of31,364 USD − 8,000 USD = 23,364 USD).The balancesheet retained
earnings is thesum of last year'sretainedearningsand the current period'sretainedearnings, or 90,000 + 23,364 = 113,364 USD. (LOS 21.e)
ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
n #124
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Question ID: 462339ᅞ A)
ᅚ B)
ᅞ C)
zerobecause there is nocurrencytranslation adjustment under the current rate method. 21,600 USD.
−3,300 USD.
Explanation
L
C
Conv
er
sion
U
SD
C
a
sh
2
5
,
000
/
2.
00
12,
500
c
u
rre
n
t
r
a
t
e
A
cco
un
ts R
e
c
e
iv
a
bl
e
3
0
,
000
/
2.
00
1
5
,
000
c
u
rre
n
t
r
a
t
e
I
n
v
e
n
to
r
y
3
5
,
000
/
2.
00
17,
500
c
u
rre
n
t
r
a
t
e
N
e
t Fix
e
d
A
ss
e
ts
500
,
000
/
2.
00
2
50
,
000
c
u
rre
n
t
r
a
t
e
T
ot
a
l
A
ss
e
ts
590
,
000
2
95
,
000
A
cco
un
ts P
a
y
a
bl
e
2
0
,
000
/
2.
00
1
0
,
000
c
u
rre
n
t
r
a
t
e
L
o
n
g
Ter
m
De
bt
1
00
,
000
/
2.
00
50
,
000
c
u
rre
n
t
r
a
t
e
Commo
n
Stoc
k
2
50
,
000
/
2.
50
1
00
,
000
histo
r
ic
a
l
r
a
t
e
R
e
t
a
i
n
e
d E
a
r
n
i
n
gs
22
0
,
000
113,36
4
an
sw
er
f
r
om p
a
r
t
2
Tr
an
sl
a
tio
n
A
d
j
u
stm
e
n
t
21,636
pl
u
g
T
ot
a
l
L
i
a
biliti
e
s &
E
q
u
ity
590
,
000
2
95
,
000
(LOS 21.e)
If the temporal method isused, theretaining earnings isclosest to:
21,600USD. 120,800 USD. 90,000 USD.
Explanation
Theretainedearnings value is the plug figure.The value of total assets is$280,813. Subtracting theaccounts payable, long-term debt, and commonstockfrom the total assets leaves$120,813.
LC Conversion USD
Cash 25,000 /2.00 12,500 current rate
Ques
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Question ID: 462340ᅚ A)
ᅞ B)
ᅞ C)
Ques
tio
n #126
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Question ID: 462341ᅚ A)
ᅞ B)
ᅞ C)
Total Assets 590,000 280,813
Accounts Payable 20,000 /2.00 10,000 current rate Long Term Debt 100,000 /2.00 50,000 current rate
Common Stock 250,000 /2.50 100,000 historical rate
Retained Earnings 220,000 120,813 280,813 − 10,000 − 50,000 − 100,000 Total Liabilities & Equity 590,000 280,813
(LOS 12.f)
If thefunctional currency is the US$ then thenet income beforearemeasurement isclosest to:
34,100USD. 4,700 USD. 8,000 USD.
Explanation
Adjust the incomestatement by theappropriaterates. ForCOGS anddepreciation, historical rates were given.Averagerate isusedforall others.
LC Conversion USD
Revenues 520,000 /2.20 236,364 average rate
COGS 225,000 /2.30 97,826 historical rate for
COGs
SG&A 100,000 /2.20 45,455 average rate
Depreciation 80,000 /2.10 39,095 historical rate for
depreciation
Income Taxes 46,000 /2.20 20,909 average rate Net Income before
remeasurement 69,000 34,079
(LOS 21.d)
If thefunctional currency had been to the US$, the currency exposure would haveresulted ina:
remeasurementloss. cumulative translation gain. remeasurement gain.
Explanation
Ques
tio
n #127
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Question ID: 472479ᅞ A)
ᅚ B)
ᅞ C)
Ques
tio
n #128
o
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Question ID: 462404ᅞ A)
ᅚ B)
ᅞ C)
LC100,000 = LC120,000).Theforeign currency appreciationalong with anet monetary asset liability exposure will result ina remeasurement loss.
Exposure ForeignCurrency Temporal Method: Appreciating Depreciating Net monetary assets Gain Loss
Net monetary liabilities Loss Gain
(LOS 21.d)
The local currency is:
the preferred functionalcurrency for subsidiaries that are highlyintegrated withthe parent.
thesameas thefunctional currency under the current rate method. translated into thefunctional currency under the current rate method.
Explanation
The local currency is best describedas the currency of the country in which theforeignsubsidiary is located.Ifasubsidiary is highly integrated with its parent or operating ina high-inflationenvironment, thefunctional currency is the parent's currency.Local currenciesare remeasuredunder the temporal method.
The SchuldesCompany had thefollowing reportedassets ineurosat historical cost for the periodending December31,2005.
Cash 134
Accounts receivable 270
Inventory 404
Net fixedassets 1347 Total assets 2155
Theexchangerate per was$0.8734 on January 1,2005 and$0.9896 onDecember31,2005.Theaverageexchangeratefor the year2005 was$0.8925.The total assets of Schuldesusing the current rate methodare:
$2,178. $2,133.
$1,923.
Explanation
With the current rate methodall balancesheet itemsexcept commonstockuse the current exchangerate to translate thefunctional currency into thereporting currency.
Ques
tio
ns #129-134
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Ques
tio
n #129
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Question ID: 462374ᅞ A)
NeptuneCorporation (Neptune) isa U.S. company located inDetroit,Michigan. Neptunesuppliesexhaust emissionsystems to
manufacturers of passenger carsand light duty trucks.In January 2006, Neptuneformeda wholly ownedsubsidiary,Continental Systems
GmbH (Continental), to supply automotive manufacturers located throughout Europe.Continental is located in Stuttgart, Germany.
Continental's most recent financial statements,denominated ineuros,are provided in Exhibit 1.
Exhibit 1: Continental Systems GmbH
Income statement
Year ended December 31
(in thousands) 2008
Sales revenue 76,000
Cost of goodssold (48,000)
Administrative expense (4,000)
Depreciation expense (6,000)
Interest expense (4,800)
Tax expense (5,760)
Netincome 7,440
Balance sheet
As of December 31 (in thousands)
Assets 2008 2007
Cash 8,800 8,000
Accounts receivable 44,000 42,000
Inventory 16,800 16,000
Fixedassets, at cost 97,200 88,000 Accumulateddepreciation (42,000) (36,000)
Total assets 124,800 118,000
Neptune hasnet monetary assetsandreports its consolidatedfinancial statements in U.S.dollars.Theeuro has been consistently appreciating against thedollar.
Continental accountsfor its inventory using thefirst-in,first-out (FIFO) cost flow assumption. Fixedassets consist of machinery, tools, andequipment.All of thefixedassets wereacquiredat the beginning of2006.
All of Neptune's U.S.employeesare covered by adefined benefit pension plan.The plan isnoncontributory and the benefitsare based on years ofserviceandemployeeearnings.Both ABOand PBO currently exceed thefair value of pension planassets.
Which of thefollowing components of the projected benefit obligation ismostlikely to increaseevery yearasadirect result of the employee working another yearfor the company?
ᅚ B)
ᅞ C)
Ques
tio
n #130
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Question ID: 462375ᅞ A)
ᅞ B)
ᅚ C)
Ques
tio
n #131
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Question ID: 462376ᅞ A)
ᅞ B)
ᅚ C)
Ques
tio
n #132
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Question ID: 462377Current service cost. Interest cost.
Explanation
The current service cost is the present value ofnew benefitsearned by theemployee working another year.Current service cost increases the PBO. Note that the interest cost increasesevery yearregardless of whether theemployee worksanother year ornot. (Study Session6,LOS 21.c)
Which of thefollowing are themostlikely impacts on gross profit marginandnet profit margin,assuming the temporal method isused to remeasureContinental'sfinancial statements?
Onlygross profitmargin willbe higher. Only net profit margin will be higher. Both will be higher.
Explanation
Under the temporal method,salesareremeasuredat theaveragerate,and cost of goodssold isremeasuredat the historical rate. Since theeuro isappreciating relative to thedollar,sales will be higher whenstated indollars.Because cost of goodssold isremeasuredat the historical rate, it doesnotreflect theappreciating euro.Therefore,appreciating sales, without a corresponding increase in cost of goods sold, will result in higher gross profit margin.
Under the temporal method,exposure isdefinedas thefirm'snet monetary asset ornet monetary liability position.Continental is holding net monetary assets (monetary assetsexceed monetary liabilities),and the position is increasing. Holding net monetary assets when the euro isappreciating will result in therecognition ofa gain in the incomestatement.The gainresults in highernet incomeand, thus, higher net profit margin. (Study Session7,LOS 22.c)
Which of thefollowing are themostlikely impacts on the operating profit marginand the long-term debt-to-equity ratio,assuming the current rate method isused to translateContinental'sfinancial statements?
Long-term debt-to-equity ratiowillbe higher. Operating profit margin will be higher.
Neitherratio will change.
Explanation
Under the current rate method,all revenuesandall expensesare translatedat theaveragerate.Consequently, thesubtotals (gross profit, operating profit,andnet profit)are translatedat theaveragerate.Translating thenumerator (operating profit)and thedenominator (sales) at thesamerate will haveno impact on theratio.
Under the current rate method,all assetsandall liabilitiesare translatedat the current rate.In orderfor the balancesheet equation to balance, total shareholders' equity must also be translatedat the current rate.Translating thenumerator (long-term debt)and the
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Whenstated in U.S.dollars, wouldContinental mostlikelyreport a higherfixedasset turnoverratio anda higherquickratio under the temporal method,as compared to the current rate method?
Onlythe quick ratiowillbe higher under the temporalmethod. Both ratios will be higherunder the temporal method.
Only fixedasset turnover will be higherunder the temporal method.
Explanation
Continental wouldreport a higherfixedasset turnoverratio (sales/fixedassets)under the temporal method becausesalesare translatedat thesamerateunder both methods (theaveragerate), but fixedassets would be translatedat the lower historical rate (because theeuro is appreciating)under the temporal method.Therefore, theratio will be higher.
Continental wouldnotreport a higherquickratio under the temporal method.Actually, thequickratio would be thesameunder both methods.Continental'squickassets include cash andaccountsreceivable.Quickassetsand current liabilitiesare convertedat the current rateunder both methods. (Study Session7,LOS 22.c)
Which of thefollowing statementsabout the temporal methodand the current rate method isleastaccurate?
Netincome is generallymore volatile under the temporalmethod than under the current rate method.
Subsidiaries whose operationsare well integrated with the parent will generally use the current rate method.
Subsidiaries that operate in highly inflationary environments will generally use the temporal methodunder U.S. GAAP.
Explanation
Subsidiaries whose operationsare well integrated with the parent will generally use the parent's currency as thefunctional currency. Remeasurement from the local currency to thefunctional currency isdone with the temporal method. (Study Session7,LOS 22.c)
If Neptune was to increase thediscount rateused in calculating the pension obligations, which of thefollowing would bemost correct, concerning itsnet incomeand thefundedstatus of the pension plan?
Higher netincome, with a higher funded status. Highernet income, with a lowerfundedstatus. Lowernet income, with a higherfundedstatus.
Explanation
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Deborah Ortiz,CFA , is thedirector of Global Research for F.E. Horton & Co.Ortiz recently hired two junioranalysts,Tina Hirauyeand
Dominique Wilkins to assist in thefinancial statement analysis of global conglomerates. Hirauyeand Wilkinsare both Level II candidates
in theCFA Program,so Ortiz thought they would be the ideal people to work ona project dealing with consolidating theresults offoreign operating units in thefinancial statements of the global parent.
Beforestarting on the project,Ortiz hasa meeting with Hirayueand Wilkins to discuss theuse ofdifferent currencies ina company's
operations.At the meeting, Hirayuestates that whenanalyzing multinational firms, there cannot beadifference between local and functional currencies. Wilkinsdisagrees with herandstates that there can beadifference between local andfunctional currencies, but only if the parent of thesubsidiary operates ina hyperinflationary environment.Afteranother30 minutes ofdiscussion,Ortiz concludes
the meeting by telling them to makesure they understand thedifferent accounting rulesforremeasurement and translation,under SFAS 52.
Hirauyeand Wilkinsare given projects involving threedifferent firms:
MolsanIndustries isaCanadian multinational firm with asubsidiary in Japan.Thesubsidiary has operations in both Japanand
Singapore.
Tylo Corporation isa multinational firm based in France.Tylo does business ona global basis, but preparesand issues consolidated financial statements in U.S.dollars.Tylo hasasubsidiary that does business in the United Kingdom.The majority of the cash that thesubsidiary generatesandexpends isdenominated inBritish Pounds (GBP).
Neslarone is based in Switzerlandand generates the majority of its cash in Swiss Francs (CHF).Thefirm issuesand prepares its
consolidatedfinancial statements in U.S.dollars.
Hirauyeand Wilkinsspend the morning reviewing thedetails of theirassignment anddecide to takea breakfor lunch at arestaurant across thestreet from F.E. Horton & Co.'s headquarters.They agree that they havea challenging taskand both arenervousabout turning in their consolidatedfinancial statements to Ortiz on thefollowing day.At therestaurant, the two junioranalystsrun into two F.E. Horton senioranalysts,Brad Windbiglerand Elizabeth Alvarez,and thefour of them decide to eat lunch together. WindbiglerandAlvarez recently
found out that they both passedLevel III of theCFA Exam,and,upon hearing about the taskassigned by Ortiz, they areeager to help their two junior colleagues. Windbiglerstates that the current exchangerate isdefinedas theexchangerate betweenfunctional and
reporting currenciesat the balancesheet date,excluding all ofafirm's hedging activities.Alvarez also tries to offerassistance by stating that the correct exchangerate to usefor monetary assetsand liabilities whenapplying the temporal method is theaveragerate. When lunch is over, Hirauyeand Wilkins thank their colleaguesfor theiradviceand go back to work to finish theirassignment.
Regarding thestatements madeat the meeting:
Hirauye's statementis incorrect;Wilkins' statementis correct. Hirauye'sstatement is incorrect; Wilkins' statement is incorrect. Hirauye'sstatement is correct; Wilkins' statement is correct.
Explanation
The basisforusing the current rate method is when Functional Currency is NOT thesameas Parent's Presentation (reporting)Currency. The basisforusing the temporal method is when Functional Currency = Parent's PresentationCurrency.
Hirauyeand Wilkins both make incorrect statementsregarding local andfunctional currencies.Aforeignsubsidiary may havea local currency but designateanother currency as itsfunctional currency.Thefunctional currency isdefinedas the currency of the primary environment in which thesubsidiary generatesandexpends cash, but the choice of thefunctional currency isultimately afunction of
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management'sjudgment. Wilkins isalso incorrect because therate of inflationdoesnot necessarily havean impact ondesignated
currencies. (Study Session6,LOS 21.a)
Hirauye is working on consolidating thefinancial statements ofMolsanIndustries' Japanesesubsidiary. Under SFAS 52,regarding ForeignCurrencyTranslation, if:
more than half of the subsidiary's revenue is fromJapanese sources, then the results of the Singapore operation are translated intoJapanese yen and then translated into
Canadian dollars.
management determines that thesubsidiary'sfunctional currency is the Japanese yen, the results of the Singapore operationarefirst remeasured into Japanese yenand then translated
into Canadiandollars.
management determines that thesubsidiary'sfunctional currency is the Singaporedollar, then theresults of the Singapore operationareremeasured into Canadiandollars.
Explanation
Thefunctional currency isdetermined by management. Financial dataareremeasured into thefunctional currency chosen by management and then translated into thereporting currency. (Study Session6,LOS 21.a)
Wilkins has been tasked with analyzing Tylo Corporation,and is trying to distinguish between the various currenciesemployed inTylo's
operations.Concerning the UK subsidiary'sfunctional andreporting currencies the:
parent firm(Tylo) is headquartered in France, therefore the functionalcurrencyis the Euro, and the reportingcurrencyis the U.S. dollar.
functional currency is theBritish Pound; reporting currency is the U.S.dollar.
functional currency andreporting currency are the U.S.dollar.
Explanation
Thefunctional currency isdefinedas the currency of the primary economic environment in which thesubsidiary generatesandexpends
cash.Although thefunctional currency can be chosen by management, because weare told that Tylo's UK subsidiary generatesand
expends cash inBritish Pounds, theBritish Pound is the best choicefor thefunctional currency.Thereporting currency is the currency in which the parent firm preparesfinal consolidatedstatements, which in this case is the U.S.dollar. (Study Session6,LOS 21.a)
Ortiz had told thejunioranalysts to makesure they understand thedifferent accounting rulesunder SFAS 52. Whenreferring to foreign exchangerates, thedifference betweenremeasurement and translation is that remeasurement:
and translation refer tothe same process of translatingthe functionalcurrencyintothe reportingcurrency.
refers to the conversion of local currency into thefunctional currency; translation is the conversion of thefunctional currency into thereporting currency.
