Foreign Currency

Question 0

foreign currency translation

Answer 0

conversion of foreign entity’s F/S into domestic currency

Question 1

foreign currency transaction

Answer 1

transactions with a foreign entity in foreign currency

Question 2

exchange rate

Answer 2

price of one unit of currency expressed in another currency
expressed as:
- direct method
- indirect method

Question 3

direct method
(exchange rate)

Answer 3

domestic price of another currency

i.e. 1 EUR = 1.47 USD

Question 4

indirect method
(exchange rate)

Answer 4

foreign price of a domestic currency

i.e. 0.68 EUR = 1 USD

Question 5

current exchange rate

Answer 5

rate at current date, or for immediate delivery of currency

also called spot rate or year end rate

Question 6

forward exchange rate

Answer 6

exchange rate existing now for exchanging two currencies at a specific future date

“bet” - what we’re betting the rate to be

Question 7

historical exchange rate

Answer 7

rate in effect at the date of issuance of stock or acquisition of assets

Question 8

weighted average rate

Answer 8

rate is calculated to take into account exchange rate fluctuations for a certain period

used for I/S

Question 9

forward exchange contract

Answer 9

agreement to exchange at a future specified date and rate a fixed amount of currencies of different countries

Question 10

denominated/fixed in a currency

Answer 10

transaction is denominated or fixed in currency used to negotiate and settle transaction

Question 11

reporting currency

Answer 11

currency of entity ultimately reporting financials of foreign entity
(USD)

Question 12

functional currency

Answer 12

currency of primary location in which entity OPERATES

usually local or reporting currency

Question 13

foreign currency translation

Answer 13

restatement of F/S denominated in FUNCTIONAL to REPORTING currency
(functional)

Question 14

foreign currency remeasurement

Answer 14

restatement of FOREIGN F/S from FOREIGN to entity’s FUNCTIONAL currency in following situations:

• reporting currency = functional currency
• F/S must be restated in entity’s FUNCTIONAL currency prior to translating F/S from FUNCTIONAL to REPORTING

(dysfunctional)

Question 15

foreign F/S translation

Answer 15

1) convert to GAAP/IFRS (in foreign currency)
2) determine functional currency (local, reporting, other)
3) determine appropriate exchange rates
2) remeasure and/or translate F/S

Question 16

determining functional currency

GAAP vs IFRS

Answer 16

GAAP:
use either local, reporting or other currency

local qualifies as functional if:

• using country currency
• foreign operations are self-contained/integrated within country
• not using parent bank
• not hyper-inflationary (cumulative 100% over 3 years)

IFRS:

• currency that influences sales prices
• currency of country whose competitive forces/regulations mainly determine sales prices
• currency that mainly influences labor, material, and other costs

Question 17

determining appropriate exchange rate

Answer 17

functional currency of foreign entity determines exchange rates used for: account balances and treatment of gains/lossess

Question 18

remeasurement/temporal method

Answer 18

“dysfunctional” (european company using yen)

F/S of foreign subsidiary is in FOREIGN currency
remeasure to parent company’s REPORTING/FUNCTIONAL currency

1) start with B/S
- monetary items = current/year-end rate (fixed)
- nonmonetary items = historical rate (fluctuate)

2) then I/S
- non B/S = weighted average rate
- B/S related = historical rate
(depreciation/PPE, COGS/inventory, amortization/intangibles)

3) remeasurement gain/loss (I/S)
plug currency gain/loss to get NI to amount needed to adjust RE and make B/S balance

Question 19

remeasurement/temporal method

GAAP vs IFRS

Answer 19

GAAP, required for use when foreign subsidiary operates in highly inflationary economy

IFRS, in highly inflationary economy, foreign subsidiary F/S must be:

• first, restated for effects of inflation
• then, converted from FOREIGN to REPORTING currency using current rate for B/S and I/S

Question 20

translation/current method

Answer 20

“functional/normal”

F/S of foreign subsidiary is in FUNCTIONAL currency
translated to parent company’s REPORTING currency

1) start with I/S
- all I/S items = weighted average rate
- transfer NI to RE

2) then B/S
- assets: current/year-end rate
- liabilities: current/year-end rate
- common stock/APIC: historical rate
- RE: roll forward
translated RE
= beg translated RE
+ translated NI for current period
- translated dividends declared for current period

3) translation gain/loss (OCI)
plug “translation adjustment” to get OCI
difference b/w debits & credits in translated trial balance
cumulative translation adjustment / CTA account

Question 21

individual foreign transaction

not settled at B/S date

Answer 21

mark to market adjustment, use spot rate
diff b/w exchange rate used in recording transaction in dollars and
exchange rate at B/S date (current exchange rate) is an unrealized gain/loss on foreign currency translation

Question 22

valuation of A&L

Answer 22

assets or liabilities resulting from foreign currency transaction should be recorded at historical rate