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CRM > 03. Reporting o/s transactions > Flashcards

03. Reporting o/s transactions Flashcards

1
Q

When is IAS21 Effects f changes in Foreign Exch rate applicable?

A
  • in accounting for transactions and balances in foreign currencies, except for those covered by IFRS 9
  • In translating results and fin position of foreign operations inc in FS of entity (either by consolidation or equity method)
  • in translating entity’s results and fin position into presentation currency
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2
Q

What is the historic rate (HR)?

A

Rate in place at date the transaction takes place

Also known as spot rate

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3
Q

What is the spot rate?

A

Same as historic rate

Rate at date transaction takes place

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4
Q

What is the closing rate?

A

Rate at reporting date

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5
Q

What are monetary assets/liabilities

A

Items that represent right to receive or obligation to pay cash

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6
Q

What are non-monetary assets/liabilities?

A

Items that give no right to receive or deliver cash e.g. PPE/ inventory

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7
Q

What is a functional currency?

A

Currency of the primary economic env in which entity operates

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8
Q

What is the presentational currency?

A

Currency in which FS are presented

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9
Q

What are the 2 types of indicators for determining the functional currency?

A

Primary
Secondary
IAS21 also provides 4 additional factors to consider when deciding whether o/s operation has the same functional currency as parent company

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10
Q

What are the primary indicators when determining the functional currency?

A
  1. Currency
    a) that mainly influences sales price for g/s (often currency they are sold/settled in) AND
    b) of the country whose competitive forces and regulations mainly determine the sales price of the G/S
  2. Currency that mainly influences labour, material and other costs of providing g/s

Basically- costs they buy and sell in!

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11
Q

What are the secondary indicators when determining the functional currency?

A
  1. Currency in which funds for financing activities are generated
  2. Currency in which receipts from operating activities are retained
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12
Q

What are the 4 additional factors when considering whether an o/s operation has the same functional currency as parent company?

A
  1. Whether o/s comp is just an extension of reporting entity (has no autonomy)
  2. Whether intercomp transactions w parent are a high % of the o/s operations turnover
  3. Whether CF from o/s operations are remitted to parent
  4. Whether CF from o/s activities are sufficient to fund t, without funds being made available from the parent
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13
Q

Individual comp translating transactions:

How should transactions be initially dealt with?

A
  • Translate using the historic rate prevailing at transaction date
  • Average rate can be used if doesn’t fluctuate significantly in acc period
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14
Q

Individual comp translating transactions:

How are settled transactions dealt with?

A

Settled = payment/receipt occurs

  • Translate it at the date of payment/receipt using the historic rate prevailing at that date
  • If this is diff to original transaction, exch diff will occur (post to P&L)
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15
Q

Individual comp translating transactions:

How are unsettled transactions dealt with in acc if they are monetary items?

A
  • Creates an outstanding A/L in SFP
  • If it is a monetary item:
    > retranslate at closing rate, put movement to P&L
    > If exch diff relates to trading transactions, disclose within other operating income/ operating expenses
    > If exch diff relates to non-trading transactions, it is disclosed within interest receivables and similar income/finance costs
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16
Q

Individual comp translating transactions:

How are unsettled transactions dealt with in acc if they are non-monetary items?

A
  • Creates an outstanding A/L in SFP
  • Cost model: NMI that are held at cost and initially translated at HR and carried fwd at this value. They are not retranslated
  • FV model: If held at FV, is initially translated at HR and retranslated at spot rate at the date the FV is determined
  • If the change in FV of item is recog directly in equity, then any related exch diffs are also recog directly in equity (e.g. revalued PPE)
  • If change in FV is recog in SPL, any related exch diffs are also recog in SPL
17
Q

What are the 2 main areas where measuring FV could be an issue?

A
  • Inventory (valuing at lower of cost v NRV - cost is @ HR but NRV is at CR
  • Impairments - comparing carrying value v recoverable amount, carrying value @ HR (unless prev revalued) but recoverable amount @ CR
18
Q

How are each of the following translated on SFP?
Assets
Share Capital
Pre-Acq reserves

Post acq reserves

Equity (Net Assets at ye) (total - no ans)
Liabilities

A

Assets - CR
Share Capital - HR
Pre-Acq reserves - HR

Post acq reserves - Bal figure, includes all forex g/l from translation since acqu and post-acq profits. Exch diff can be recorded separately in a ‘translation reserve’ if desired

Equity (Net Assets at ye) (total - no ans)
Liabilities - CR

19
Q

How are income and expense in SPL translated?

A

All translated at AR

20
Q

What exchange diffs arise on translation of a subsidiary?

and how is it calculated?

A
  • Diffs from translation of SPL at average rate and translation of A/L at CL rate
  • Diffs on opening net assets retranslated at new closing rate

Calculated as:
Op NA - trans @ CR x
Op NA - trans @ OR (X)
= X

Prof for year - trans @ CR X
Profit for year - trans @ AR (X)
= X

Exch diff from translating sub X

This diff arising on translation is reported in OCI and held in equity

21
Q

How do you consolidate o/s subsids (especially GW)?

A

Translate into sterling, then consolidate as normal
But there will be an exch diff arising from the treatment of goodwill
As GW is an asset of sub so must be re-translated each year at CR

22
Q

Why does GW translation for o/s subsid consolidation create an exch diff?
How is the exch diff calculateD?

A

As GW is an asset of sub so must be re-translated each year at CR
Gives rise to further exch diff which is held in equity
Exch diff calc’ed as:
1. Calc GW in foreign currency
2. Translate at historic rate (acq date)
3. Translate GW at CR
4. Dif between HR and CR is added onto parent comp’s share of exch diff on nNA of subsid (assuming proportionate method is used to value GW)

23
Q

Where is the exch diff on GW between opening and closing SFP shown?

A

Shown as OCI

24
Q

How are statement of cash flows dealt with for o/s subsid consolidation?

A

IAs 7 requires CF associated with foreign currency transactions to be recorded at each rate on date of cash flow

25
Q

Why is hyperinflation an issue for overseas subsids?

A

In a hyper inflationary economy, money loses its purchasing power v quickly
Ao comparisons of transactions at diff points of time would be misleading

26
Q

How are o/s hyper inflationary economies dealt with in consolidations?

A

FS of entities operating in hyper inflationary economies must be restated in terms of current measurement at reporting date

27
Q

How are SFP non-monetary items restated in accounts if there is a hyperinflationary o/s subsid?

A

Restated by multiplying the original cost (or revalued amount) by a factor
= (price index at period end date / price index at acq date or date of valuation) (/ = divided by)

28
Q

How are SFP monetary items restated in accounts if there is a hyperinflationary o/s subsid?

A

They are not restated as they are already carried at current value

29
Q

How are SPL items restated in accounts if there is a hyperinflationary o/s subsid?

A

All items are retranslated by multiplying the original value by a factor
= (Price index at rep date / average price index for period)

30
Q

How are net monetary gains/losses restated in accounts if there is a hyperinflationary o/s subsid?

A

Although monetary items aren’t retranslated, there will be overall gain/loss
If entity has net monetary assets, it will lose
If it has net monetary liabilities, it will gain

This net gain/loss must be reported as part of net income

31
Q

What are the audit and assurance implications of overseas transactions?

A

Greatest risk when acquire new subsid with functional currency that is different to presentational currency

Key issues revolve around using the correct exch rates to translate the o/s balances into functional currency and calc forex diffs
Audit tests are as follows:
- Confirm HR to initially record transactions
- Confirm CR for monetary A/L
- Reperform calc to confirm YE balances
- Recalc G/L on settled/ unsettled transactions

32
Q

What are the audit risks surroundingg overseas subsidiaries

A
  • Mostly around idea of translating at correct exch rate
    1. Non - compliance with IAS21 for a) incorrect exch rates b) incorrect posting of exch diffs
    2. Non-compliance with IFRS 3 Bus combinations - for good will calc complex, including use of FV etc
    3. Relying on work of other auditors of subsid that may be concerned with local GAAP requirements rather than IFRS standards
    4. Elimination of intercomp balances
33
Q

What are the procedures to deal with the following audit risk:

  1. Non - compliance with IAS21 for a) incorrect exch rates b) incorrect posting of exch diffs
A
  • Obtain WP and recalc exch diff
  • Confirm exch rates
  • Agree exch diffs to reserve workings
34
Q

What are the procedures to deal with the following audit risk:

  1. Non-compliance with IFRS 3 Bus combinations - for good will calc complex, including use of FV etc
A
  • Recalc GW figure
  • Agree FV of consideration to contract
  • Agree any FV changes of NA to supporting documentation
35
Q

What are the procedures to deal with the following audit risk:
3. Relying on work of other auditors of subsid that may be concerned with local GAAP requirements rather than IFRS standards

A
  • Evaluate other auditors’ reputation and qualification to determine competence and independence
  • Provide clear audit instructions
  • Site visits
36
Q

What are the procedures to deal with the following audit risk:
4. Elimination of intercomp balances

A
  • Review LY WP to identify balances not repeated this year

- Confirm there are no undisclosed intercomp transactions in the letter of rep

CRM (6 decks)

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