F-2 FOREIGN CURRENCY

Question 1

Q: Identify the two foreign currency activities.

FAR 2-33

Answer 1

• Foreign currency translations
• Foreign currency transactions

Question 2

Q: What is an entity’s functional currency under U.S. GAAP?

FAR 2-34

Answer 2

The functional currency is the currency of the primary economic environment in which the entity operates.

All of the following conditions must be met:

• The foreign operations are relatively self-contained and integrated within the country.
• The day-to-day operations do not depend on the parent’s or investor’s functional currency.
• The local economy of the foreign entity is not highly inflationary.

Question 3

Q: When is the translation method used?

FAR 2-35

Answer 3

• Translation is used to restate financial statements denominated in the functional currency to the reporting currency.

Question 4

Q: When is the remeasurement method used?

FAR 2-36

Answer 4

Remeasurement is used to restate financial statements from the foreign currency to the entity’s functional currency when:

• The reporting currency is the functional currency.
• The financial statements must be restated in the entity’s functional currency prior to translating from the functional currency to the reporting currency.

Question 5

Q: Identify the exchange rate to be used when translating different components of the balance sheet and income statement.

FAR 2-37

Answer 5

Assets and Liabilities
Current exchange rate

Common Stock and APIC
Historical rate

Revenue and Expenses
Weighted-average exchange rate for the period

Question 6

Q: Identify the exchange rate to be used when remeasuring different components of the balance shset and income statement.

FAR 2-38

Answer 6

Balance Sheet
• Monetary—current exchange rate

• Nonmonetary—historical rate

Income Statement
• Balance sheet related—historical rate

• Non-balance-sheet related—weighted-average

Question 7

Q: Where are remeasurement gains/losses reported in the financial statements?

FAR 2-39

Answer 7

• Remeasurement gains and losses are recognized on the income statement.

Question 8

Q: Where are translation adjustments reported in the financial statements?

FAR 2-40

Answer 8

• Translation gains or losses are reported in other comprehensive income.
• They are treated as unrealized gains and losses.

Question 9

Q: State two types of foreign currency transactions.

FAR 2-41

Answer 9

• Operating transactions, such as importing, exporting, borrowing, lending, and investing transactions
• Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate

Question 10

Q: Where are foreign currency transaction gains or losses reported in the financial statements?

FAR 2-42

Answer 10

• Foreign currency transaction gains or losses are included in determining net income for the period.

Question 11

Q: For operating transactions in foreign currency, detail the recording process.

FAR 2-43

Answer 11

• Record original transaction at exchange or spot rate on date of transaction
• At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.
• On payment date, compute gain/loss on the transaction by using the exchange rate on payment date

Question 12

Q: What are the general guidelines for OCBOA financial statement presentation?

FAR 2-44

Answer 12

• Different titles from accrual basis financial statements.
• Required financial statements are the equivalent of the accrual basis balance sheet and income statement
• Financial statements should explain changes in equity accounts.
• A statement of cash flows is not required.
• Disclosure should be similar to GAAP financial statement disclosures