Ch07: Re-measurement and Translation of ForEx

Question 1

Re-measurement

Answer 1

local currency to functional currency

shows the accounts as if the subsidiary recorded its transactions in the functional currency.

when the subsidiary does most of its business in the parent’s reporting currency, only re-measurement is needed.

reported on the income statement

Question 2

Translation

Answer 2

functional currency to reporting currency

maintain the same financial picture as displayed in the subsidiary’s functional currency.

when the subsidiary does most of its business in the local currency, only translation is required.

reported in OCI

Question 3

Reporting Currency

Answer 3

The parent’s currency

Question 4

Functional Currency

Answer 4

The currency of where the subsidiary conducts most of its business.

Identifying the FC:
where cash flows are incurred
sales are made
expenses are incurred
financing is conducted

Question 5

Local Currency

Answer 5

The currency of where the subsidiary reports its accounts.

Question 6

Remeasurement Procedures

Answer 6

1. Monetary Assets - Liabilities
2. Assets carried at cost: rate of when the asset was acquired
   PPE, intangible assets
3. Capital Stock: historical rate
4. Dividends: Spot rate (when declared)
5. Revenues and Expenses: avg. rate
   depreciation, amortization, impairment: rate of when the asset was acquired

Question 7

Re-measurement Effects

Answer 7

matches current rates to current prices; historical rates to historical prices.

all financial ratios are impacted.
local currency ratios doesn’t equal functional currency ratios.

functional currency ratios best reflect the subsidiary’s financial picture.

Question 8

Monetary Assets and Liabilities

Answer 8

Assets and liabilities that are carried at fair value; fixed in terms of currency units; current year (end) rate
Monetary Assets: cash, AR, HTM investments carried at fair value and most liabilities.

Question 9

Re-measurement Gain or Loss

Answer 9

Reported on the income statement
Impacts the sub economically

Beg. exposure = Beg. [monetary assets - liabilities]
Nonmonetary assets:
sales
COGS
OpEx (exclude depreciation)
Dividends
CapEx, PPE
change in exposure = [(change in equity) - (change in nonmonetary assets)]
End. exposure = End. [monetary assets - liabilities]
Remeasurement (gain) / loss = change in re-measurement exposure - End. exposure

Question 10

Translation Gain or Loss

Answer 10

Reported in OCI
Doesn’t impact the subsidiary economically

Beg. exposure = (-) Beg. (equity)
Net Income = (-) [(Sales) + COGS + Expenses]
Dividends = (-) Dividends
End. exposure = (-) Beg. (equity) + NI + (-) Dividends