FAR 2: Section 6 - Foreign Currency Accounting

Question 1

Identify the 2 foreign currency activities.

Answer 1

1. Foreign currency translation

2. Foreign currency transactions

Question 2

What is an entity’s functional currency under US GAAP?

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:

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

Question 3

When is the translation method used?

Answer 3

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

Question 4

When is the re-measurement method used?

Answer 4

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

1. The reporting currency is the functional currency
2. The financial statement must be restated in the entity’s functional currency prior to the translating from the functional currency to the reporting currency.

Question 5

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

Answer 5

Asset and Liabilities: Current exchange rate

Common Stock and APIC: Historical rate

Revenue and Expenses: Weighted average exchange rate for the period

Question 6

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

Answer 6

Balance sheet:

1. Monetary - Current exchange rate
2. Non-Monetary

Income Statement:

1. Balance sheet related - historical rate
2. Non-balance sheet related - weighted average

Question 7

Where are remeasurement gains / losses reported in the financial statement?

Answer 7

Remeasurement gains or losses are recognized on the income statement

Question 8

Where are translation adjustment reported in the financial statements?

Answer 8

Translation gains or losses are reported in the OCI. They are treated as unrealized gains and losses.

Question 9

State two types of foreign currency transactions.

Answer 9

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

Question 10

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

Answer 10

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

Question 11

Where are foreign currency transaction gains or lossees reported in the financial statements?

Answer 11

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

Question 12

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

Answer 12

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

Question 13

What are the general guidelines for OCBOA F/S presentation?

Answer 13

1. Different titles from accrual basis financial statements.
2. Required financial statements are equivalent of the accrual basis balance sheet and income statement.
3. F/S should explain changes in equity accounts
4. A statement of cash flows is not required
5. Disclosures should be similar to GAAP F/S disclosures.