FAR 6 - Foreign Operations

Question 1

What are the four ways an entity may be involved with foreign operations?

Answer 1

1. Foreign currency transactions
2. Receivable or payable on F/S that is denominated in a foreign currency
3. Foreign currency exchange transactions (forward exchange rate contracts)
4. Foreign division or subsidiary

Question 2

Transactional Currency

vs.

Functional Currency

vs.

Reporting Currency

Answer 2

Transactional currency = local currency (recording currency) - currency of particular country where the books and records are kept

Functional Currency = greatest economic impact on company (currency in which the entity generates & expends cash)

Reporting Currency = currency in which enterprise prepares its financial statements (usually US $)

Question 3

Translation of Financial Statements

(Transaction=Functional —> Reporting)

Assets & Liabilities

Income Statement Items

Contributed Capital

Answer 3

Assets & Liabilties - Current Rate

Income statement items - Weighted Average Rate

Contributed Capital (stocks, etc.) - Historical Rates

Translation adjustments are part of OCI

Translate from I/S to BS

Question 4

Remeasurement of Financial Statement Items

(Transactional —> Functional=Reporting)

Monetary Assets & Liabilities

Non-Monetary Assets & Liabilities

Income Statement Items

Answer 4

Monetary Assets & Liabilities - Current Rate

Non-Monetary Assets & Liabilities - Historical Rates or WA

Income Statement Items - Weighted Average Rates

Remeasurement adjustments are part of I/S

Translate from BS to I/S

Question 5

Key Point: Which exchange rate to use?

Answer 5

If there is a foreign exchange rate contract, use the expected exchange rate. (Example, if it’s November 2, use the rate due in 30 days, )

30-day futures Spot rate
November 2, 20X1 $0.62 $0.63
December 31, 20X1 $0.65 $0.64
January 30, 20X2 $0.65 $0.68

Question 6

Which of the following statements regarding foreign exchange gains and losses is correct?

Answer 6

Transaction gains or losses result from a change in exchange rate between the functional currency and the currency in which the transaction took place.

Holders of receivables achieve a gain from an increase in the exchange rate as they will be receiving more of the functional currency when the receivable is settled, but debtors also repay liabilities with more of the functional currency, causing a loss. The reverse is also true, a creditor (receivable) incurs a loss when there is a decrease in the rate and a debtor experiences a gain when there is a decrease.

Question 7

Hedging Disclosures (3)

Answer 7

1. Relationship between the hedge & the hedged risk
2. Indication that the hedge is expected to be highly effective
3. An explanation as to how the entity measures the hedge’s effectiveness

Question 8

IFRS

Transactions & Translations

Answer 8

Foreign Currency - (Transactional in GAAP)

Functional - (Same as GAAP)

Presentational - (Reporting in GAAP)