Multinational operations

Question 1

Three types of currencies in reporting context

Answer 1

presentation currency, functional currency, local currency

Question 2

In terms of financial reporting, what is a foreign currency?

Answer 2

any currency other than functional currency

Question 3

What is required recognition method for foreign currency transaction gains and losses (realized and unrealized) under IFRS abd US GAAP?

Answer 3

• both require realized as well as realized gains/losses to be reported in net income
• the two most common treatments: component of OCI; component of non-operating income/expense

Question 4

Two primary conceptual issues associated with translation

Answer 4

• deciding on appropriate exchange rate
• bringing balance sheet back to balance

Question 5

the three translation methods

Answer 5

• current rate method: all assets and liabilities at current rate, equity - at historical
• monetary / non-monetary: monetary assets/liabilities - at current; non-monetary assets/liabilities - at historical
• temporal method: monetary and non-monetary assets/liabilities (that are measured at current value) - current rate; else - historical rate

Question 6

what translation method is required under IFRS and GAAP? (not considering inflationary environment)

Answer 6

• if functional currency is also parent’s presentation currency: temporal method
• if functional currency is different from parent’s presentation currency: current rate method
• if local currency is different from functional currency, then financial statement is restated into functional currency using temporal method

Question 7

how translation adjustment is treated under temporal vs current method?

Answer 7

• current rate method: balance is regained by adding ‘translation adjustment’ to the balance sheet
• temporal method: balance is regained by adjusting retained earnings in the income statement with added ‘translation gain/loss’ entry

Question 8

how accounts are translated in hyperinflationary environment under IFRS and US GAAP?

Answer 8

• IFRS: financial statements are to be restated for inflation, then translated using current rate method
  
  • US GAAP: no restatement, temporal method is used

Question 9

How common stock and equity values are translated under the current rate method?

Answer 9

• when equity is broken into separate accounts, common stock is translated at historical rate
• however, when equity is taken as a whole, it is translated at the current rate