FAR - Specific Transactions, Events, & Disclosures - Conversion of Foreign Financials

Question 1

Conversion of foreign financials

Answer 1

Convert foreign financials into domestic currency

1) financials could be of: sub, investee, PTP, JV

2) conversion need to:
- apply equity method
- combine/consolidate with entities/parents

Question 2

Recording currency

Answer 2

currency which foreign books/initial financials are prepared

Question 3

Reporting currency

Answer 3

currency in which, consolidated, financials are prepared

Question 4

Functional currency****

Answer 4

currency of primary economic economic environment in which an entity operates/generates net CFs

• determines how to convert financials

Possible functional currencies:

1) recording - foreign entity’s local currency
2) reporting currency - currency of final reporting entity
3) another foreign currency - foreign currency other than recording currency

Question 5

functional currency = local recording currency when:

Answer 5

1) foreign operations are self-contained/integrated within country in which located
- operations/CFs occur in country of location

EXCEPTION
if local economy = hyperinflation (cumulative inflation % of 100% or more over 3 yr period) - local currency cannot be functional currency
- in that case, reporting currency = functional currency

Question 6

functional currency = reporting currency

Answer 6

1) foreign operations = direct/integral component or extension of U.S. entity’s operations
- foreign operation closely tied to U.S. entity
- couldn’t operate independent of U.S. entity

OR

2) local economy = hyperinflation - 100%/+ over 3 yr period

Question 7

TRUE/FALSE

method to be used to convert financial statements of a subsidiary from a foreign currency to the parent’s currency depends primarily on the functional currency of the subsidiary. Whether the functional currency of the subsidiary is the local foreign currency, the parent’s currency, or another foreign currency will determine the conversion method or methods to be used

Answer 7

TRUE

Question 8

highly inflationary (hyperinflationary) economy

Answer 8

is one that has experienced a CUMULATIVE inflation of 100% or more over the past 3 years

Question 9

current (or spot) exchange rate

Answer 9

exchange rate in effect at the current time (or as close thereto as possible); that is, at the time of the transaction or revaluation

Question 10

Translation Conversion (Current Rate Method)

Use when Functional currency = local/recording currency

Answer 10

1) insure foreign financials are according to GAAP - adj if necessary
2) convert most B/S accts using current rate

3) convert income accts - revenues, expenses, gains/losses:
- exchange rate at date item earned/incurred
- weighted avg rate for the period

Question 11

Translation Conversion

Convert B/S Accts

Answer 11

1) Assets/Liab using spot (current) rate @ B/S Date
2) PIC using historic rate in existence when paid-in item arose

3) RE = computed:
- BOY RE + Translated I/S - Divs declared @ spot rate = EOY RE

Question 12

Translation Adj.

Answer 12

Amount needed to balance the debits/credits

• item of OCI
• Flows through to AOCI in O/E Section

Question 13

true/false

Translation gains and losses are reported in other comprehensive income; a translation loss would result in a debit (decrease) to other comprehensive income. A translation gain would result in a credit (increase) to other comprehensive income

Answer 13

true

Question 14

Remeasurement Conversion

Temporal Method

Answer 14

1) insure foreign financials accord to GAAP - adj. is needed

2) convert accts using temporal method:
- monetary items = fixed in dollar value
- non-monetary items = change in dollar value as prices change

3) remeasure monetary items using current rate
- remeasure non-monetary items using historic rate that existed when acct/item arose

Question 15

Remeasurement conversion

Use historic rates for:

Answer 15

assets/liab
securities carried @ cost
inv @ cost
prepaid costs
fixed asset/acc. dep
intangible assets/goodwill
deferred/unearned rev
paid-in-capital
rev/exp related to asset/liab
COGS
deprec/amort

Question 16

Remeasurement conversion

use current rates for:

use W/A for?

Answer 16

current:
- all other monetary asset/liab

W/A:
- rev/exp occurred evenly yr round

Question 17

remeasurement Adj

Answer 17

remeasured TB doesn’t balance

Amount need to balance = remeasurement adj.

• recognize as gain/loss in income statement
• Flows to RE

Question 18

Conversions using both remeasurment & translation

Functional Currency = another foreign currency

Answer 18

1) Remeasure from local recording currency to functional currency
2) translate resulting financial statement from functional currency to reporting currency

• 2 conversion adj
  1) Remeasurement - I/S
  2) Translation - OCI

Question 19

Remeasurement & Translation GAAP vs IFRS

Answer 19

GAAP:

1) FC based on primary economic activities
2) Equity translated @ historic rates
3) Hyperinflationary statements remeasured as if reporting = FC

IFRS:

1) FC = based on primary/secondary indicators
2) No guidance on what rate to use
3) hyperinflationary statements indexed to GPL and then translated to reporting currency

Question 20

true/false

Under the translation method of converting, income statement items are converted using the average exchange rate for the period

Answer 20

true