FRA: multinational operations

Question 1

Types of FX rates for the sake of FRA

Answer 1

1) Current - on the date of reporting
2) Average - average on the reporting period
3) Historical - on the date of transaction

Question 2

When different methods apply?

Answer 2

1) Local -> functional, decision-making is centralized: temporal method
2) Functional -> presentation, subsidiary company is relatively independent: current rate
3) Hyperinflation: temporal (GAAP) or current rate (IFRS)

Question 3

Current rate method description

Answer 3

1) PnL items - average rate
2) BL items - current rate, so only net exposure (usually positive) matters
3) Exceptions (historical rate) - common stock and dividends
4) Translation gains and losses are reported in shareholder’s equity (CTA), that is why it is better to start translation with PnL

Question 4

Temporal method description

Answer 4

1) Monetary assets and liabilities - current rate. Given that almost all assets are not monetary, while most of liabilities (expect deferred revenue) are, the net position is usually negative
2) Non-monetary assets and liabilities - historical rate
3) PnL items - average rate expect for those related to monetary assets (historical rates)
4) Translation gains and losses are reported on PnL, that is why it is better to start from translation with BS

Question 5

What is hyperinflation

Answer 5

When commutative inflation exceeds 100% in 3 years

- 26% a year

Question 6

What is restating for hyperinflation?

Answer 6

Multiplying certain items on the price index (end-of-year / average-of-year) under IFRS:

1) Non-monetary assets and liabilities
2) Components of shareholder’s equity (other than RE)
3) PnL items

Question 7

What is clean-surplus accounting?

Answer 7

Including gain and losses reported in shareholders’ equity on PnL for the sake of analysis