FAR 12

Question 1

In a forward exchange contract how is it reported on the B/S

Answer 1

at fair value with unrealized gains and losses recognized.

So if you have and exchange between Co. A and Co B where on Dec 31 will result in a gain for one and a loss for the other

Co A will recognize and asset and a gain for $27,000

and

Company B will recognize a liability and a loss for the $27,000

Question 2

If a foreign subsidiary’s local currency is its functional currency - will you translate or remeasure the F/S?

Answer 2

They will be translated

Question 3

If you translate a foreign subsidiary’s F/S how do you translate revenue and expense items

Answer 3

Revenue and expense items like sales to customers and wages expense would be translated using the weighted average exchange rate

Question 4

What is the difference between recording currency, reporting currency and functional currency

Answer 4

Recording currency - what the books are recorded in

Reporting currency - the currency that the final financial statements will be in

Functional currency - the currency often primary economic environment that the entity operates in

Question 5

What are the exceptions for then the reporting currency is the functional currency

Answer 5

• If the local economy is in higher inflation - 100% or more for 3 years
• If the foreign operations could not operate without the US entity’s operations

Question 6

What do you do to the F/S if the local recording currency is the functional currency

Answer 6

You translate them to the US dollar using translation

Question 7

What do you do if the sub uses the US dollar as the functional currency, but records in the local currency

Answer 7

The financials are remeasured to US dollars

Question 8

What do you do when the sub’s functional currency is something other than the functional currency?

Answer 8

1 - the subs F/S are first remeasured from recording currency to functional currency

2 - then they are translated from functional currency to US dollars

Question 9

Translation Rules

Answer 9

• Assets and Liabilities are translated using the spot rate on B/S date
• I/S accounts are translated using:
• the exchange rate at the date the item was earned or incurred
• the weighted avg exchange for the period

Retained Earning is computed - the converted T/B will not balance

A translation adjustment is made to balance - this is captured in OCI - Foreign currency translation adjustment

Question 10

Remeasurement Rules

Answer 10

• Use sport rate for all monetary items - assets and liabilities (A/P and A/R)
• Use historic rates for non-monetary items like fixed assets, prepaid expense, COGS and depreciation
• use weighted avg. for revenues and expenses that occurred evenly throughout the year

Remeasured trial balance will not balance either

will have to make a Remeasurement adjustment to make it balance - this is recognized as a gain or loss from income from continuing operations and flows through to RE

Question 11

What is the difference between the Remeasurement and Translation adjustment at the end of the year

Answer 11

Remeasurement - it is recognized as a Gain or Loss in Income from Continuing Operations and flows through to Retained Earnings

Translation - the adjustment is captured in OCI - Foreign Currency Translation Adjustment

Question 12

Remeasurement then Translation

Answer 12

It is simply remeasured and translated

You do this when the sub’s functional currency is something other than the functional currency

the first conversion adjustment - remeasurement adjustment which goes through the income statement to R.E.

The second is the translation adjustment which goes through the statement of OCI

Question 13

What do you do if you have both a translation loss adjustment and cash flow hedge gain that does not exceed the loss

Answer 13

The translation adjustment is reported in OCI

When an investment is hedged - any translation loss is recognized in income to offset the gain on the hedge instruments

If there is excess translation loss - this is reported in OCI

Question 14

When an entity has a variable rate liability - how will is use derivative to protect itself

Answer 14

It they think interest rates will increase they might enter into an interest rate swap. This will protect it from changes in future payments - this is a cash flow hedge

Question 15

Under IFRS what are the proper terms when dealing with foreign operations

Answer 15

Foreign - the foreign currency is any currency other than the functional currency

Function - the currency of the primary economic environment

Presentation - the currency in which the F/S are being presented

Question 16

Under IFRS how are cashflow hedges and hedges of net investments in foreign operations different than than GAAP

Answer 16

cashflow hedges and hedges net of investments in foreign operations are both accounted for similarly to US GAAP - gains and losses recognized in OCI

Question 17

How is income recognized under the amortized cost approach

Answer 17

Interest income will equal the yield rate you expect to get so 10% of 198,000 investment in bonds = interest income of $19,800.

The actual amount received i is the stated rate = 6% of $300,000 = $18,000

The difference - 19,800 - 18,000 = $1,800 is the amortization of the discount so the carrying value of the bond = $198,000 + $1,800 = $199,800

Question 18

When is land held for resale reclassified as a current asset

Answer 18

when is actually sells after B/S date and before the issuance of F/S

Question 19

What do you do if you wrote checks that overdraw your account but don’t mail them till after the B/S date

Answer 19

You add back in the actual amount of cash in the account