FAR 2 - Foreign Currency Accounting

Question 1

Define foreign currency transaction?

Answer 1

Transactions with a foreign entity

Question 2

Define foreign currency translation?

Answer 2

Conversion of financial statements of a foreign entity into financial statements expressed in domestic currency

Question 3

Define direct method for exchange rate?

Answer 3

Domestic price of one unit of another company.

1 euro cost $1.47

Question 4

Define indirect method for exchange rate?

Answer 4

Foreign price of one unit in the domestic currency

.68 euros buys $1.00

Question 5

Current Exchange Rate definition?

Answer 5

Exchange rate at current date

SPOT RATE / YEAR END RATE

Question 6

Define forward exchange rate?

Answer 6

BET - betting what the future currency rate will be in the future, so we are locking it in now.

Question 7

Define historical exchange rate?

Answer 7

Rate in effect at the date of issuance of stock or acquisition of assets - Used for equity

Question 8

When is weight average rate used?

Answer 8

Used in income statement

Question 9

Define reporting currency?

Answer 9

The reporting currency is the currency of the entity ultimately reporting financial results of the foreign entity

Question 10

Define functional currency?

Answer 10

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

Question 11

Define foreign currency translation?

Answer 11

restatement of financial statements denominated in the functional currency to the reporting currency

JAPAN SUB USES YEN. USE TRANSLATION

Question 12

Define foreign currency remeasurement?

Answer 12

restatement of financial statements of foreign financial statements from foreign currency to functional currency

JAPAN SUB USES $US. USE REMEASUREMENT

Question 13

What are steps in restating foreign financial statements?

Answer 13

1) Convert from IFRS to U.S. GAAP

2) Determine functional currency: ALL 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 high inflationary, DEFINED AS CUMULATIVE INFLATION OF 100% over three years

Question 14

How to report accounts in remeasurement method?

Answer 14

In following order:

1) Balance Sheet
- Monetary Items - Current/Year End Rate
- Non-Monetary Items - Historical Rate

Monetary means FIXED
Nonmonetary means fluctuate

2) Income Statement
Income statement items - Weighted Avg Rate
Balance sheet accounts (cogs/inventory, depreciation) - Historical Cost

SUMMARY:
Historical Cost - Balance Sheet items in income statement, and non-monetary items (things that fluctuate)

Weighted Avg Rate - Non-balance sheet items

Question 15

Where do remeasurement Gain or Loss go?

Answer 15

Income Statement

Question 16

How to report accounts in translation method?

Answer 16

In following order:

1) Income statement
All income statement items - Weighted average rate
Transfer net income to retained earnings

2) Balance Sheet
Assets and Liabilities - Current/year end rate
APIC and C/S - Historical rate

Question 17

Where do translation Gain or Loss go?

Answer 17

Other Comprehensive Income