10 Multinational Ops

Question 1

Functional currency

Answer 1

Determined by management.
The currency of the primary economic environment in which the entity operates.

Question 2

When does exchange rate risk arise?

Answer 2

When the transaction date and payment date differ

Question 3

What is the balance sheet treatment of foreign currency transactions?

Answer 3

If BS date is before payment data, unrealised G/L is recognised
On BS date, BS amounts are therefore adjusted based on the current spot rate
On the payment date, an additional G/L is recognised if exchange rate has moved since BS date

Question 4

What is remeasurement?

Answer 4

Converting local currency into functional currency using the temporal method

Question 5

What is translation?

Answer 5

Converting the functional currency into the parent’s presentation currency using the current rate method

Question 6

When would you use the current rate method? Who does it usually apply to?

Answer 6

When the functional currency is different to the presentation currency
Independent subsidiaries whose activities are decentralised from the parent

Question 7

When would you use the temporal method? Who does it usually apply to?

Answer 7

When the functional currency is the same as the presentation currency
When the subsidiary is well integrated e.g. parent makes decisions

Question 8

When would you use the temporal and current rate method?

Answer 8

When the local currency, functional currency and presentation currency are all different.

Question 9

What is the current rate? Average rate? Historic rate?

Answer 9

Current rate = rate on the BS date
Average = average over the reporting period
Historic = the actual rate that was in effect on the transaction date

Question 10

If the local currency is the same as the functional currency…

Answer 10

Translate statements via current rate method

Question 11

If local currency different to functional currency, but functional currency is the same as the presentation currency…

Answer 11

Remeasure statements via temporal method

Question 12

If local currency, functional currency and presentation currency are all different…

Answer 12

Remeasure local to functional, then translate functional to presentation

Question 13

What is a monetary asset or liability?

Answer 13

They are fixed in the amount of currency to be paid or received e.g. cash, receivables, payables, short and long term debt

Question 14

What is a nonmonetary asset or liability?

Answer 14

All other assets and liabilities
E.g. inventory, fixed and intangible assets
Liabilities include unearned revenue

Question 15

How is the temporal method applied?

Answer 15

M.A&L = current rate
NM.A&L = historic rate
A&L measured at FV on BS = current rate
Equity accounts = historic rates
COGS/Depreciation = historic rates
Revenue and expenses = average rate
Remeasurement G&L = income statement

Question 16

What is the impact of the temporal method on net income volatility?

Answer 16

More volatile as remeasurement gains and losses hit the income statement (current rate method hits equity)

Question 17

How does the cost flow assumption affect the measurement of inventory and COGS?

Answer 17

FIFO ending inventory is measured based on recent FX rates; COGS on older rates
LIFO ending inventory is measured based on older exchange rates; COGS on more recent rates

Question 18

When is the current rate method applied?

Answer 18

When the functional currency is different than the presentation currency

Question 19

How is the current rate method applied?

Answer 19

Income statement = average rate
Balance Statement = current rate
Common stock = historic rate
Dividends = the rate from when they were declared
Gains and losses = reported under equity as CTA (cumulative translation adjustment)

Question 20

What is the CTA?

Answer 20

A plug figure that forces the accounting equation to balance

Question 21

How do you measure the parent companies exposure to changing FX rates?

Answer 21

Current rate = exposure is the net asset position i.e. the subsidiary’s equity
Temporal method = net monetary asset or liability position

Question 22

If the local currency appreciates/depreciates, what is the impact under the current rate method and temporal method?

Answer 22

Current rate = Appreciation in local currency leads to a gain on assets and a loss on liabilities
Temporal = Appreciation in local currency leads to a gain on net monetary assets and a loss on net monetary liabilities

Question 23

How can a firm eliminate their exposure to FX risk under temporal method?

Answer 23

By balancing their monetary assets and liabilities, so that no gain or loss is recognised