Foreign Operations

Question 1

[TRUE or FALSE] A foreign operation’s financial statements must be translated to Philippine pesos before they can be combined with the home office’s financial statements.

Answer 1

ANS: TRUE.

Question 2

[TRUE or FALSE] A foreign operation is defined as only a subsidiary whose activities are based in a country other than the reporting enterprise.

Answer 2

ANS: FALSE. A foreign operation is defined as a subsidiary, associate, joint venture, or branch whose activities are based in a country other than the reporting enterprise.

Question 3

[TRUE or FALSE] Integral foreign operations function independently from the reporting enterprise and have minimal impact on its cash flows.

Answer 3

ANS: FALSE. Integral foreign operations carry on their business as if they were an extension of the reporting enterprise’s operations and can have an immediate effect on its cash flows.

Question 4

[TRUE or FALSE] Changes in exchange rates affect the net investment in an integral foreign operation rather than individual monetary items.

Answer 4

ANS: FALSE. Changes in exchange rates affect the individual monetary items held by an integral foreign operation rather than the reporting enterprise’s net investment in that operation.

Question 5

[TRUE or FALSE] A foreign operation classified as non-integral typically remits all proceeds directly to the reporting enterprise.

Answer 5

ANS: FALSE. An integral foreign operation typically remits all proceeds directly to the reporting enterprise.

Question 6

[TRUE or FALSE] A non-integral foreign operation primarily conducts its activities, including income generation and borrowings, in its local currency.

Answer 6

ANS: TRUE.

Question 7

[TRUE or FALSE] A change in exchange rates significantly impacts the cash flows of a non-integral foreign operation and the reporting enterprise.

Answer 7

ANS: FALSE. A change in exchange rates has little or no direct effect on the cash flows of a non-integral foreign operation or the reporting enterprise.

Question 8

[TRUE or FALSE] The effect of exchange rate changes on a non-integral foreign operation primarily influences individual monetary and non-monetary items.

Answer 8

ANS: FALSE. The effect of exchange rate changes on a non-integral foreign operation primarily influences the reporting enterprise’s net investment in that operation.

Question 9

[TRUE or FALSE] Non-integral foreign operations can transact in foreign currencies, including the reporting currency, apart from their local currency.

Answer 9

ANS: TRUE.

Question 10

[TRUE or FALSE] The financial statements of a foreign operation must be translated before being incorporated into the reporting entity’s financial statements.

Answer 10

ANS: TRUE.

Question 11

[TRUE or FALSE] Goodwill and fair value adjustments of a foreign subsidiary are translated at the average exchange rate.

Answer 11

ANS: FALSE. Goodwill and fair value adjustments of a foreign subsidiary are translated at the closing rate.

Question 12

[TRUE or FALSE] Exchange differences for a non-wholly-owned subsidiary are allocated only to the parent entity.

Answer 12

ANS: FALSE. Exchange differences for a non-wholly-owned subsidiary are allocated to both the owners of the parent and the NCI.

Question 13

[TRUE or FALSE] The translation procedures apply to the foreign operation’s financial statements during incorporation into the reporting entity’s financial statements.

Answer 13

ANS: TRUE.

Question 14

[TRUE or FALSE] The net investment in a foreign operation refers to the reporting entity’s interest in the net assets of that operation.

Answer 14

ANS: TRUE.

Question 15

[TRUE or FALSE] A trade receivable or trade payable can be considered part of the net investment in a foreign operation if settlement is neither planned nor likely to occur in the foreseeable future.

Answer 15

ANS: FALSE. Only monetary items like long-term receivables or loans, not trade receivables or trade payables, can be considered part of the net investment in a foreign operation under these conditions.

Question 16

[TRUE or FALSE] Exchange differences on a monetary item that forms part of a reporting entity’s net investment in a foreign operation are recognized in profit or loss in the consolidated financial statements.

Answer 16

ANS: FALSE. Exchange differences on such monetary items are recognized in other comprehensive income in the consolidated financial statements.

Question 17

[TRUE or FALSE] Exchange differences recognized in other comprehensive income related to a net investment in a foreign operation are reclassified to profit or loss upon disposal of the net investment.

Answer 17

ANS: TRUE.

Question 18

[TRUE or FALSE] Long-term loans to a foreign operation, if settlement is not planned or likely in the foreseeable future, may be part of an entity’s net investment in that foreign operation.

Answer 18

ANS: TRUE.

Question 19

[TRUE or FALSE] Exchange differences on net investments in foreign operations are always recognized directly in equity in separate financial statements.

Answer 19

ANS: FALSE. Exchange differences are recognized in profit or loss in separate financial statements of the reporting entity or the foreign operation, as appropriate.

Question 20

[TRUE or FALSE] Upon the disposal of a foreign operation, the cumulative exchange differences in other comprehensive income are reclassified to profit or loss.

Answer 20

ANS: TRUE.

Question 21

[TRUE or FALSE] On a partial disposal of a foreign operation, the entire cumulative exchange difference is reclassified from equity to profit or loss.

Answer 21

ANS: FALSE. Only a proportionate share of the cumulative exchange difference is reclassified from equity to profit or loss.

Question 22

[TRUE or FALSE] The reclassification of exchange differences to profit or loss upon disposal of a foreign operation is referred to as the reclassification method.

Answer 22

ANS: TRUE.

Question 23

[TRUE or FALSE] Hyperinflation refers to a moderate increase in prices within an economy over a short period.

Answer 23

ANS: FALSE. Hyperinflation refers to rapid, excessive, and out-of-control general price increases, typically exceeding 50% per month.

Question 24

[TRUE or FALSE] Hyperinflation can make it difficult for a country to meet its financial obligations and produce goods and services.

Answer 24

ANS: TRUE.

Question 25

[TRUE or FALSE] Hyperinflation frequently occurs in stable economies without any underlying causes.

Answer 25

ANS: FALSE. Hyperinflation does not occur often and usually has specific causes, such as war, natural disasters, or political corruption.

Question 26

[TRUE or FALSE] Hyperinflation raises consumer prices to the extent that everyday necessities become hard for consumers to afford.

Answer 26

ANS: TRUE.

Question 27

[TRUE or FALSE] A sudden and significant increase in the money supply always leads to hyperinflation.

Answer 27

ANS: FALSE. Hyperinflation occurs when the increase in money supply is not supported by economic growth.

Question 28

[TRUE or FALSE] Central banks sometimes increase the money supply during economic downturns to stimulate spending and lending.

Answer 28

ANS: TRUE.

Question 29

[TRUE or FALSE] The relationship between GDP growth and the money supply plays no role in the occurrence of hyperinflation.

Answer 29

ANS: FALSE. If GDP growth does not match the increase in the money supply, hyperinflation can occur.

Question 30

[TRUE or FALSE] Hyperinflation is often associated with a cycle of rising prices, increased consumer spending, and further currency production.

Answer 30

ANS: TRUE.

Question 31

[TRUE or FALSE] When the functional currency is that of a hyperinflationary economy, an entity must restate its financial statements under PAS 21 before applying PAS 29.

Answer 31

ANS: FALSE. Corrected Statement: When the functional currency is that of a hyperinflationary economy, an entity must first restate its financial statements under PAS 29 before applying PAS 21.

Question 32

[TRUE or FALSE] All amounts in restated financial statements are translated at the closing rate as of the most recent statement of financial position date.

Answer 32

ANS: TRUE.

Question 33

[TRUE or FALSE] Comparative amounts for financial statements translated into a non-hyperinflationary currency must be adjusted for changes in the price level and exchange rates.

Answer 33

ANS: FALSE. Corrected Statement: Comparative amounts for financial statements translated into a non-hyperinflationary currency are not adjusted for subsequent changes in the price level or exchange rates.

Question 34

[TRUE or FALSE] An entity can avoid restating its financial statements under PAS 29 by changing its functional currency to one from a non-hyperinflationary economy.

Answer 34

ANS: FALSE. Corrected Statement: An entity cannot avoid restating its financial statements under PAS 29 by adopting a functional currency other than the one determined under PAS 21.

Question 35

[TRUE or FALSE] When an economy ceases to be hyperinflationary, the entity must use historical costs for future translations based on the price level at the time restatements ceased.

Answer 35

ANS: TRUE.