Foreign Currency Accounting (F6M5)

Question 1

Reporting currency

Answer 1

US $

-currency of entity ultimately reporting financial results of foreign entity

Question 2

Foreign currency

Answer 2

-currency of the primary economic environment which the entity operates

Local currency = functional currency if:

1. operations use that country’s currency
2. self contained (do their own banking)
3. not hyperinflationary (100% in 3 years)

Question 3

Translation or remeasurement?

Answer 3

TRANSLATION: sub’s currency = functional currency
REMEASUREMENT: sub’s currency does NOT = functional currency

Question 4

Remeasurement (temporal method)

Answer 4

-use if “dysfunctional” (sub’s currency is not the functional currency)

BALANCE SHEET:

• monetary items = current/year end rate
• nonmonetary = historical rate

INCOME STATEMENT:

• non BS related items = weighted average
• BS related items = historical (depreciation/ppe; cogs/inventory ; amortization/bonds)

G/L = plug to net income (IS) to get retained earnings to balance the balance sheet.

Question 5

Highly inflationary economy under IFRS

Answer 5

-if highly inflationary, GAAP requires remeasurment.

• IFRS on the other hand requires:
• first be restated for effects of inflation
• then convert to reportinf currency using CURRENT/YE rate for ALL elements of balance sheet AND income statement

Question 6

Translation (current rate method)

Answer 6

INCOME STATEMENT:

• weighted average
• net income -> retained earnings

BALANCE SHEET:

• assets/liabilities = current/YE
• common stock/APIC = historical
• retained earnings = roll forward

G/L = OCI to make balance sheet balance