Chapter 13 - Foreign transactions and foreign subsidiaries

Question 1

Starndard dealing with foreign exchange

Answer 1

IAS 21

Question 2

IAS 21

Answer 2

Governs the fair disclosure of gains and losses

Question 3

IAS 21 Provisions

Answer 3

> > Objectives and definitions of functional and presentation currencies

> > Accounting for individual transactions in a foreign currency

> > Translating the Financial Statement of a foreign operation

Question 4

Foreign Currency Activity

Answer 4

Individual foreign currency transaction
»>
Translate via Functional Currency

Foreign Operations
>>>
Translate via Presentation Currency 
>>>
Consolidate into Group Accounts

Question 5

Two types of foreign activities

Answer 5

1) individual transactions in foreign currencies

2) Foreign Operations

Question 6

Individual Transactions in Foreign Currencies

Answer 6

> > Purchase or sales denominated in a foreign currency

> > Borrowing or Lending funds denominated in a foreign currency

> > Acquisitions or disposals denominated in a foreign currency

Question 7

Foreign Operations in foreign currency

Answer 7

A foreign operation, subsidiary, Associate, joint Venture, or branch conducting activities in a foreign currency

Question 8

Types of Currencies

Answer 8

1) Functional Currency
2) Foreign Currency
3) Local Currency
4) Presentation Currency

Question 9

Functional Currency

Answer 9

Currency of the primary economic environment

Question 10

Foreign Currency

Answer 10

Currency other than the functional currency

Question 11

Local Currency

Answer 11

Currency of the country in which the foreign entity is located

Question 12

Presentation Currency

Answer 12

Currency in which the financial statements are presented

Question 13

Determining the Functional Currency

Answer 13

> Currency that influences selling prices
Currency of the country whose competition and regulation influence prices
Currency of funds used to finance operations
Currency in which receipts are normally kept
Currency that influences direct and operational costs

Question 14

Determining the Presentation Currency

Answer 14

According to IAS 21, its all up to the company.

Why Functional and Presentation may be different:

> Transparency
Main Investors
Funding

Question 15

Foreign currency translation rule

Answer 15

IAS 21: Foreign currency transactions must be recorded by translating the foreign currency amount into the entity’s Functional currency based:

1) on when a transaction occurred
2) if any currency gain or loss be recorded if the exchange rate is different when the transaction is paid for

Question 16

Initial Measurement Rule

Answer 16

Transaction recorded as:
> Spot exchange rate
> An average rate over a period of time
> Contract Rate

Question 17

Subsequent measurement rule

Answer 17

Retranslation

IAS 21: exchange rate gains or losses made from re-translation of individual transactions be recognized in profit and loss in the period they arise

Question 18

Subsequent Measurement

Monetary Items

Answer 18

Restated at the rate for the end date of the Financial Statement

Question 19

Subsequent Measurement

Non-Monetary Items

Answer 19

Items carried at historic cost are not restated

Items carried at fair value are restated at the rate for when the fair value was decided

Question 20

Translation of Financial statement of a foreign owned subsidiary

Answer 20

Financial Statement of the Subsidiary will be translated into the presentation currency of the parent

Question 21

Translation of Financial statement of a foreign owned subsidiary

Method

Answer 21

Consolidated SOFP

Goodwill, Assets and Liabilities are translated at the closing rate

Question 22

Translation of Financial statement of a foreign owned subsidiary

Method

Answer 22

Consolidated Income Statement

Income and expenses are translated at the actual rate or average rate

Question 23

Re-Translation of Goodwill

Answer 23

Restated from the closing rate of the previous reporting period to the closing rate of the current reporting period

Question 24

Re-translation of Group retained earnings

Answer 24

Profits are translated at the average rate

Question 25

Accounting for exchange rate gains and losses

Consolidated Income Statement

Answer 25

Total Exchange rate gains or losses are reported in other comprehensive income

Question 26

Accounting for exchange rate gains and losses

Consolidated SOFP

Answer 26

The group share of exchange rate gain or loss is reported as a component of equity in a foreign exchange reserve

Question 27

Foreign exchange reserve

Answer 27

This is an unrealised gain or loss, this will only be realised on its disposal.

The foreign exchange gain/loss is the reclassified as profit/loss

Question 28

Translation using presentation currency rules

Answer 28

> SOFP - Translate at average rate
Income Statement - Translate at average rate
Calculate the exchange rate difference and treat as a component of equity