FRA - Multinational Operations

Question 1

Transaction of foreign currency transactions

Answer 1

1. translated into functional currency at the exchange rates at the date of transaction
2. monetary A/L at the B/S date are re-valued at the exchange rate date
3. diff. arising on the transaction are recognized on I/S

Question 2

Local currency <> Functional

Answer 2

Temporal method - remeasurement

Question 3

Functional <> Reporting

Answer 3

Current rate method - translation

Question 4

Monetary A/L

Answer 4

Current rate

Question 5

Non-monetary (inventories, u/r)

Answer 5

Historical under Temporal

Current under Current

Question 6

Capital equity

Answer 6

Historical in both method

Question 7

I/S statement

Answer 7

Use average under Current

Use average under Temporal, except for COGS use historical

Question 8

G/L in translateion

Answer 8

under temporal: I/S as re-measurement
affect retained earnings

under Current:
B/S equity, result in CTA (g/s is added/subtracted to/from beg. CTA

Question 9

FIFO

Answer 9

Temporal method: ENDING inventories remeasured at relatively recent rate

COGS: use first purchase cost of inventory

Question 10

LIFO

Answer 10

Temporal method: ending inventories remeasured at relatively older rate

COGS: at new inventory cost

Question 11

Retained earnings as a plug

Answer 11

BB R/E
+NI
-Dividend
=Ending R/E

Question 12

Temporal method exposure

Answer 12

monetary asset - monetary liabilities

Question 13

Current rate exposure

Answer 13

shareholder’s equity

Question 14

flow effect

Answer 14

change in exposure in LC * (ending rate - average rate)

Question 15

holding g/l effect

Answer 15

bb exposure in LC * (ending -beg)

Question 16

Financial ratios when LC currency appreciate

Answer 16

under current method:
pure B/S and I/S ratios don’t change

B/S, I/S mixed ratios, lower ratios

Question 17

Financial ratios when LC currency depreciate

Answer 17

under current method:
pure B/S and I/S ratios don’t change

B/S, I/S mixed ratios, higher ratios

Question 18

Hyperinflation economies

Answer 18

cumulative 3-year inflation > 100% (26% per year on average)

Question 19

translation in hyperinflation economy

Answer 19

IFRS

1. monetary a/l not restated
2. non-monetary a/l restated for changes in the general purchasing power of the monetary unit
3. all components of shareholders’ equity are restated by applying the change in the general price level from the beginning of the period

restate carrying value using inflation rate and apply current exchange rate, to get CTA

g/l recorded on I/S

Question 20

effective tax rate impact of foreign taxes caused by

Answer 20

1. changes in applicable tax rates

2. changes in the mix of profits earned in different jurisdictions

Question 21

Which TRANSLATION method should be used under a hyperinflationary economy when using U.S. GAAP?

Answer 21

if reporting = functional currency, the temporal method is more appropriate because all non-monetary accounts are remeasured at the historical rate. No restatement is needed.

Under IFRS, the financials would be restated for inflation, and then translated under the current rate method.

Question 22

Deferred revenue

Answer 22

is a non-monetary liability and should be translated at the historic rate.