Module 3

Question 1

Hedging

Answer 1

Hedging reduces the effect of exchange rate volatility on business transactions. This is achieved by taking the opposite position of the underlying transaction by using derivatives.

Question 2

Exchange rate

Answer 2

The ratio for exchange of two currencies at a particular time

Question 3

Spot rate

Answer 3

The exchange rate for immediate delivery

Question 4

Forward rate

Answer 4

The rate of exchange agreed today for later delivery

Question 5

Translation exposure

Answer 5

Having assets/liabilities denominated in a foreign currency, there is a risk that their value will change due to a movement in exchange rates

Question 6

Local currency

Answer 6

The currency of the country in which the foreign operation is based

Question 7

Functional currency

Answer 7

The currency of the primary economic environment in which the foreign entity operates

Question 8

Presentation currency

Answer 8

The currency in which the financial statements are presented by the reporting entity

Question 9

Monetary

Answer 9

Units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency

e.g. cash, accounts receivable, accounts payable

Question 10

Non-Monetary

Answer 10

Do not have the right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. e.g. inventory, PPE, intangibles

Question 11

Importance of Translations

Answer 11

• Allows the parent entity to account for its foreign operations
• Reflects in the consolidated financial statements
• Provides stakeholders with information on the economic effects of an exchange rate change for the parent

Question 12

Determining the Functional Currency

Answer 12

Para 9 of IAS 21: primary economic environment, mainly influences sales prices, competitive forces and regulation, the currency that influences labour, material and other costs

Para 10 of IAS 21: Currency of which funds from financing activities and receipts from operating activities are retained

Para 11 of IAS 21: Whether the company has a significant degree of autonomy, transactions between parent and sub are a high or low proportion of the activities, whether CF of sub affect parent, whether CF can be used for the debt of the parent

Para 12 IAS 21: Management can use its own judgement

Question 13

Presentation currency

Answer 13

A company can present its financial statements in ANY currency

Question 14

When to use each method

Answer 14

Para 39 method: the functional currency of sub is different to the functional currency of parent, independent to parent

Para 23 method: more appropriate when the functional currency of the sub is the same as the parent, integrated with the parent

Question 15

Sales Revenue

Answer 15

average rate

Question 16

Dividend Revenue

Answer 16

actual rate

Question 17

Opening Inventory

Answer 17

39: opening rate
23: actual rate

Question 18

Purchases

Answer 18

average rate

Question 19

Closing Inventory

Answer 19

actual rate

Question 20

Monetary Expenses

Answer 20

average rate

Question 21

Non-Monetary Expenses

Answer 21

39: average rate
23: actual rate

Question 22

Income Tax Expense

Answer 22

average rate

Question 23

Dividends

Answer 23

actual rate

Question 24

Monetary assets

Answer 24

closing rate

Question 25

Non-Monetary Assets

Answer 25

39: closing rate
23: actual rate

Question 26

Monetary Liabilities

Answer 26

closing rate

Question 27

Non-Monetary Liabilities

Answer 27

39: closing rate
23: actual rate

Question 28

Share Capital (at acquisition)

Answer 28

Investment rate

Question 29

Retained Earnings (at acquisition)

Answer 29

Investment rate

Question 30

Reserves (at acquisition)

Answer 30

Investment rate

Question 31

Disclosure

Answer 31

Para 51 to 57 require disclosure of:

• exchange differences in P or L
• net exchange differences in equity and reconciliation
• when the presentation is not the same as functional, the fact they are different, what the functional currency is, the reason why they are different
• When there is a change in functional currency, need to say a change occurred and why

Question 32

How have standards on foreign currency developed

Answer 32

• rise of globalisation has increased the volume of transactions in foreign currencies
• fluctuations have caused firms to threaten to cut back to avoid earnings volatility

Question 33

How to neutralise exchange rate effects

Answer 33

• Para 39: finance the purchase of sub by borrowing funds in the same currency as the functional currency of the sub. A loss would offset a gain.
• Para 23: An attempt should be made to keep the net monetary position as close as possible to zero, this would make the gain/loss = 0.

Question 34

Treatment of translation differences

Answer 34

Para 39: FCTR

Para 23: Income Statement

Question 35

Para 23 method for Gain on Sale

Answer 35

1. carrying value at the date of purchase
2. carrying value at the date of sale
3. translation difference in carrying value
4. gain on sale at the rate on sale (from para 39 method)
   5 - the difference between 3 and 4 = gain on sale for para 23