Foreign Currency Accounting

Question 1

Foreign currency transactions

Answer 1

Transactions w/foreign entity denominated in a foreign currency

Question 2

Foreign currency translation

Answer 2

Conversion of FS of a foreign entity into FS expressed in the domestic currency

Question 3

Direct method exchange rate

Answer 3

Domestic price of one unit of another currency (i.e. 1 euro = $1.47

Question 4

Indirect method exchange rate

Answer 4

Foreign price of one unit of domestic currency (i.e. $1 = .68 euros

Question 5

Currency exchange rate

Answer 5

The exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate

Year end/spot rate

Question 6

Forward exchange rate

Answer 6

The exchange rate existing now for exchanging 2 currencies at a specific future date

“Bet”

Question 7

Historical exchange rate

Answer 7

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

Used for equity

Question 8

Weighted average rate

Answer 8

Calculated to take into account the exchange rate fluctuations for the period

Used for income statement

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

Reporting currency

Answer 10

Currency of the entity ultimately reporting financial results of the foreign entity

Question 11

Functional currency

Answer 11

Currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency

Question 12

Foreign currency translation

Answer 12

Restatement of financial statements denominated in the functional currency to the reporting currency using appropriate rates of exchange

Functional

Question 13

Foreign currency remeasurement

Answer 13

Restatement of foreign FS from the foreign currency to the entity’s functional currency in the following situations:

1. Reporting currency is the functional currency
2. FS must be restated in entity’s functional currency prior to translating FS from functional currency to reporting currency

Question 14

Steps in restating foreign financial statements

Answer 14

1. Prepare in accordance with GAAP/IFRS
2. Determine the functional currency
3. Determine appropriate exchange rates
4. Remeasure and/or translate the FS

Question 15

Under US GAAP, when does an entity’s local currency qualify as the function currency?

Answer 15

When it is the currency of the primary economic environment in which the company operates, and all of the following conditions exist:

1. Foreign operations are relatively self-contained and integrated w/in the country
2. Day-to-day operations do not depend on the parent’s or investor’s functional currency
3. Local economy of foreign entity in NOT highly inflationary, which is defined as cumulative inflation of 100% over 3 years

Question 16

Under IFRS, what are the 3 factors that have priority when determining an entity’s functional currency?

Answer 16

1. The currency that influences sales prices for goods/services
2. The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods/services
3. The currency that mainly influences labor, material, and other costs of providing goods/services

Question 17

Remeasurement method (temporal method)
["Dysfunctional"]

Answer 17

Remeasure from foreign currency to functional currency

B/S:

• Monetary items = current/year-end rate (fixed)
• Nonmonetary items = historical rate (fluctuate)

I/S:

• Non-balance sheet related items = weighted avg rate
• Balance sheet related items = historical rate

Question 18

How is remeasurement gain or loss calculated?

Answer 18

Plug “currency gain/loss” to get NI to the required amount need to adjust RE in order to make BS balance

Question 19

When an entity operates in a highly inflationary economy under IFRS, what must first be done before converting from foreign currency to reporting currency?

Answer 19

The FS must first be restated for the effects of inflation then must be converted to reporting currency using the current/year-end rate for all elements of BS and IS

Question 20

Translation method (current rate method)
["Functional"/normal]

Answer 20

Translate from functional currency to reporting currency

I/S:

• All IS items = weighted avg rate
• Transfer NI to RE

B/S:

• Asset = current/year-end rate
• Liabilities = current/year-end rate
• Common stock/APIC = Historical rate
• RE = roll forward

Question 21

Under the translation method, what does translated RE equal?

Answer 21

Translated RE = Beg. translated RE + Translated net income for current period - Translated dividends declared for current period

Question 22

How is translation gain or loss calculated?

Answer 22

Plug “translation adjustment” to OCI

It is equal to the difference b/w debits and credits in the translated trial balance

Cumulative translation adjustment (CTA)

Question 23

Types of foreign currency transactions

Answer 23

• Operating transactions (import/export, borrowing/lending)

- Forward exchange contracts

Question 24

In a foreign currency transaction, when would a gain or loss result?

Answer 24

If the exchange rate changes between the time a purchase/sale in foreign currency is contracted for and the time actual payment is made

Question 25

What results if there is a difference between the exchange rate used in recording the transaction in dollars and the exchange rate at the balance sheet date (current exchange rate)?

Answer 25

An unrealized gain or loss on the foreign currency transaction

Question 26

In foreign currency transactions, how should the assets and liabilities resulting from the transactions be recorded?

Answer 26

Using the exchange rate in effect at date of transaction

Question 27

Under US GAAP, a foreign subsidiary’s functional currency is the currency of what?

Answer 27

Of the environment in which the subsidiary primarily generates and expends cash

Question 28

Where are gains and losses resulting from foreign exchange transactions that are an “extension” of he parent’s domestic operations included in?

Answer 28

As a component of “income from continuing operations” in the period in which they occur

Question 29

Where is cumulative foreign exchange translation loss reported?

Answer 29

In a stockholders’ equity contra account (AOCI)