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Flashcards in FAR 57 - Conversion of Foreign FS Deck (43):
1

Which of the following statements concerning the objectives of foreign currency translation is/are correct?

I. To reflect financial statements in conformity with U.S. GAAP.
II. To provide information that generally is compatible with expected effects of exchange rate changes on an entity's cash flows and equity.

Both I and II. The objectives of foreign currency translation are intended both to reflect financial statements in conformity with U.S. GAAP and to provide information that generally is compatible with expected effects of exchange rate changes on an entity's cash flows and equity.

2

The specific method to be used to convert financial statements of a subsidiary expressed in a foreign currency into the domestic currency of the parent depends primarily on:
A. The reporting currency of the subsidiary.
B. The reporting currency of the parent.
C. The functional currency of the subsidiary.
D. The functional currency of the parent.

C. The method to be used to convert financial statements of a subsidiary from a foreign currency to the parent's currency depends primarily on the functional currency of the subsidiary. Whether the functional currency of the subsidiary is the local foreign currency, the parent's currency, or another foreign currency will determine the conversion method or methods to be used.

3

Determining a foreign subsidiary's functional currency will take into account which of the following?

I. The extent to which the subsidiary operates, and generates and expends cash in the local foreign economy in which it is located.
II. The cumulative inflation rate in the local foreign economy in which it is located.

Both I and II. Determining a foreign subsidiary's functional currency will take into account both the extent to which the subsidiary operates, and generates and expends cash in the local foreign economy in which it is located and the cumulative inflation rate of that economy.

4

Which one of the following would constitute a highly inflationary economy when determining the functional currency of a foreign entity?
A. 20% inflation for each of the past 5 years.
B. 30% inflation for each of the past 3 years.
C. 35% inflation for each of the past 3 years.
D. 20%, 35%, and 40% inflation, respectively, for each of the past 3 years.

C. For determining a functional currency, a highly inflationary (hyperinflationary) economy is one that has experienced a cumulative inflation of 100% or more over the past 3 years. Inflation of 35% per year over the past three years is a cumulative 105% and constitutes a highly inflationary economy.

5

Which one of the following would best describe the functional currency of a foreign subsidiary of a U.S. parent?
A. The currency in which the subsidiary maintains its books.
B. The dollar - the functional currency of the parent.
C. The currency of the primary economic environment in which the subsidiary operates and generates most of its net cash flow.
D. The currency of the country in which the foreign subsidiary is located.

C. The functional currency of a foreign subsidiary would be the currency of the primary economic environment in which the subsidiary operates and primarily generates and expends cash. That currency could be the recording currency, the reporting currency, or another foreign currency.

6

Which of the following could be the functional currency of a foreign subsidiary?

I. The recording currency of the foreign subsidiary.
II. The reporting currency of the subsidiary's parent.
III. A currency other than either the recording currency of the foreign subsidiary or the reporting currency of the subsidiary's parent.

I, II, and III.

7

The financial statements expressed in a foreign currency that need to be converted to a domestic currency could be the financial statements of a/an:
Equity Investee
Subsidiary to be Consolidated

Yes, yes
The financial statements expressed in a foreign currency needing to be converted to a domestic currency could be those of either an equity investee or a subsidiary to be consolidated (or a branch, a joint venture, a partnership, or any other separate foreign operation).

8

T/F: If an investor accounts for an investment in a foreign entity using the equity method (because it has significant influence), the investor likely will need to translate the financial statements of the foreign entity.

True

9

T/F: The functional currency of an entity is determined by the primary economic environment of the entity.

True

10

T/F: In order for the recording currency of a foreign entity to be its functional currency, the foreign entity must be relatively self-contained and integrated within the country.

True

11

T/F: The currency in which an entity keeps its books is necessarily the reporting currency for that entity.

False

12

T/F: A highly inflationary economy is defined by FASB as being one that has an inflationary rate of 100% per year.

False.
Over 3 years

13

T/F: If the local foreign economy is highly inflationary, the local (recording) currency cannot be the functional currency.

True

14

T/F: The functional currency of a foreign entity determines how its financial statements should be translated.

True

15

T/F: If a foreign entity's operations are an extension of its U.S. parent, the functional currency for the foreign entity will be its local foreign currency.

False
It would be the parent's functional currency.

16

Which one of the following would not be translated using the spot (or current) exchange rate as of the balance sheet date?
A. Cash.
B. Accounts payable.
C. Common stock.
D. Investments held-for-trading.

C. When converting financial statements from a foreign currency to a reporting currency using translation, paid-in capital accounts are translated using the historic exchange rate in effect when the account amount arose (or when the investment was made, if later). Therefore, common stock would not be translated using the spot (or current) exchange rate as of the balance sheet date, but the historic exchange rate for the common stock.

17

Dividends declared by a subsidiary in a foreign currency use which of the following exchange rates during the translation process to convert to US dollars for reporting purposes?
A. Historic exchange rate when sub was established
B. Weighted average exchange rate for the current year
C. Spot exchange rate at date dividend declared
D. Spot exchange rate at December 31, CY

C. Since translation should be used to convert the subsidiary's financial statements expressed in FCUs to U.S. dollars, dividends declared should be translated at the exchange rate in effect when the dividends were declared (the same would be true for re-measurement).

18

A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating:
Sales to Customers
Wages Expense

Yes, yes
Since the functional currency is the local currency, the income statement of the subsidiary would be converted using translation, which requires the use of the exchange rate when a revenue/gain was earned or expense/loss was incurred, or the weighted average exchange rate for the year. Therefore, the weighted average exchange rate for the current year would be an appropriate rate for converting both sales to customers and wages expense.

19

A subsidiary's functional currency is the local currency which has not experienced significant inflation. The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the:
A. Exit exchange rate.
B. Historical exchange rate.
C. Weighted average exchange rate over the economic life of each plant asset.
D. Weighted average exchange rate for the current year.

D. The weighted average exchange rate for the current year is the correct rate to use to convert depreciation expense. Since the functional currency is the local currency, the income statement of the subsidiary would be converted using translation, which requires the use of the exchange rate when a revenue/gain was earned or expense/loss was incurred, or the weighted average exchange rate for the year. Since depreciation expense is incurred throughout the year, the weighted average exchange rate normally is the appropriate basis for conversion.

20

Which one of the following could not be translated using the weighted average exchange rate for the fiscal year?
A. Rent expense.
B. Cash.
C. Sales.
D. Wage expense.

B. When converting financial statements from a foreign currency to a reporting currency using translation, assets and liabilities are translated using the spot (or current) exchange rate as of the balance sheet date, not the weighted average exchange rate for the period. Therefore, cash could not be translated using the weighted average exchange rate for the fiscal year.

21

Panco, a U.S. entity, has a subsidiary, Sanco, located in a foreign country. Sanco's operations are concentrated in the country in which it is located and are essentially independent of Panco. The economy of the foreign country is not highly inflationary. Which one of the following processes should Panco use to convert Sanco's financial statements to dollar-based statements for consolidation purposes?
A. Translation.
B. Re-measurement.
C. Translation, and then re-measurement
D. Re-measurement, and then translation.

A. Because Sanco operations are concentrated in the country in which it is located and essentially independent of Panco, and the economy of the foreign country is not highly inflationary, Sanco's local foreign currency is its functional currency. Therefore, its financial statements expressed in the foreign currency will be converted to U.S. dollars using translation.

22

Which one of the following would not be translated using either the spot exchange rate as of the balance sheet date or the weighted average exchange rate for the period?
A. Cash.
B. Accounts payable.
C. Common stock.
D. Investments held-for trading.

C. When converting financial statements from a foreign currency to a reporting currency using translation, paid-in capital accounts are translated using the historic exchange rate in effect when the account amount arose (or when the investment was made, if later). Therefore, common stock would not be translated using either the spot (or current) exchange rate as of the balance sheet date or the weighted average exchange rate for the period, but the historic exchange rate for the common stock.

23

Which of the following should be reported as a debit to other comprehensive income in preparing the statement of comprehensive income?
A. Translation gain.
B. Translation loss.
C. Re-measurement gain.
D. Re-measurement loss.

B. Translation gains and losses are reported in other comprehensive income; a translation loss would result in a debit (decrease) to other comprehensive income. A translation gain would result in a credit (increase) to other comprehensive income.

24

In converting financial statements from a foreign currency to a reporting currency, which one of the following accounts would not be translated using an exchange rate?
A. Accounts receivable.
B. Bonds payable.
C. Common stock.
D. Retained earnings.

D. When converting financial statements from a foreign currency to a reporting currency using translation (or re-measurement), retained earnings is not translated using an exchange rate. Rather, retained earnings is calculated using already converted values. Specifically, beginning retained earnings in dollars + converted net income - converted dividends declared = ending retained earnings in dollars.

25

The functional currency of Nash Inc.'s subsidiary is the Euro. Nash borrowed Euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash's translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash's consolidated financial statements?
A. The translation loss and the exchange gain are reported separately in other comprehensive income.
B. The translation loss less the exchange gain is reported in the income statement.
C. The translation loss is reported separately in other comprehensive income, and the exchange gain is reported in the income statement.
D. The translation loss is reported in the income statement, and the exchange gain is reported separately in other comprehensive income.

A. Since the borrowing was intended to hedge Nash's investment in its foreign subsidiary (operation), the exchange gain on the borrowing would offset the translation loss on the investment, with both being reported as translation adjustment items in other comprehensive income.

26

T/F: If the financial statements of a foreign entity were prepared without being in conformity with U.S. GAAP, those statements must be adjusted to U.S. GAAP before they are converted to dollars.

True

27

T/F: In converting financial statements using the translation process, paid-in capital items (common stock, additional paid-in capital, etc.) should be converted using the exchange rate in effect when the investor acquired the entity.

True

28

T/F: In converting financial statements using the translation process, dividends declared by the foreign entity would be converted at the exchange rate in effect when the dividends were declared.

True

29

T/F: The amount needed to make a translated balance sheet balance is the amount of the required translation adjustment.

True

30

T/F: When the translation process of converting financial statements is used, the amount of the translation adjustment is reported as an item of "Other Comprehensive Income."

True

31

Using re-measurement, inventory should be converted using which of the following exchange rates if the inventory was acquired evenly in 2008?
A. Historic exchange rate when Sub was established by Parent
B. Historic exchange rate when Sub's fixed assets were acquired
C. Weighted average exchange rate for 2008
D. Spot exchange rate at December 31, 2008

C. The inventory should be converted using the historic exchange rate in effect when the inventory was acquired. In this case, then inventory was acquired evenly during 2008 and the weighted average exchange rate would be the correct rate to use.

32

A balance arising from the translation or re-measurement of a subsidiary's foreign currency financial statements is reported in the consolidated income statement when the subsidiary's functional currency is the:
Foreign currency
U.S. dollar

No, yes
Two different methods can be used for converting the financial statements of a foreign subsidiary, either translation or re-measurement. Which method is used depends on the functional currency of the foreign subsidiary. If the local foreign currency is the functional currency, the statements are translated. If the U.S. dollar is the functional currency, the statements are re-measured. Re-measurement gains and losses affect the income statement, while translation gains or losses are carried directly to an equity account, bypassing the income statement entirely.

This response is correct because a balance arising from re-measurement is reported in the income statement whenever the U.S. dollar is the functional currency (which requires that the financial statements be re-measured).

33

Which one of the following would not be re-measured using a historic exchange rate?
A. Cash.
B. Inventories carried at cost.
C. Property, plant, and equipment.
D. Common stock.

A. Under the re-measurement method of converting financial statements from a foreign currency to a reporting currency, monetary assets and liabilities are converted using the current exchange rate, not a historic exchange rate. Therefore, cash (the most monetary of assets) would be converted using the current exchange rate, not a historic exchange rate.

34

Eagle, Inc. is a manufacturer and distributor of consumer products in the U.S. It has a wholly owned foreign subsidiary, El Rio, which sells Eagle products in Mexico. El Rio receives all of its products from Eagle, sells those products, and remits the proceeds to Eagle. El Rio maintains its books and prepares its financial statements in the Mexican peso. Which one of the following methods will Eagle most likely use to convert El Rio's financial statements to dollar-based statements?
A. Translation.
B. Re-measurement.
C. Translation and then re-measurement.
D. Re-measurement and then translation.

B. Because El Rio's operations are a direct extension of Eagle, the peso is not El Rio's functional currency; Eagle's currency, the U.S. dollar, is El Rio's functional currency. Therefore, El Rio's financial statements will be converted to U.S. dollars using re-measurement.

35

Which one of the following expenses would be re-measured using a historic exchange rate?
A. Rent expense.
B. Wage expense.
C. Depreciation expense.
D. Selling expenses.

C. Under the re-measurement method of converting financial statements from a foreign currency to a reporting currency, most expenses (and revenues, gains, and losses) are converted using the current exchange rate. Expenses related to assets and liabilities converted at a historic rate are an exception - they are converted using a historic exchange rate. Therefore, since depreciation expense does result from an asset (property, plant, and equipment) measured using a historic exchange rate, depreciation expense would be re-measured using a historic exchange rate.

36

When a foreign entity's financial statements are converted to a reporting currency using re-measurement, how will the adjustment needed to make the converted balance sheet balance (the "translation adjustment") be reported?
A. As an item of other comprehensive income.
B. As an extraordinary item.
C. As an item in income from continuing operations.
D. As an asset or liability, depending on whether a debit or credit is needed to balance the balance sheet.

C. When re-measurement is used to convert financial statements expressed in a foreign currency to a reporting currency, any resulting translation adjustment (gain or loss) is reported as an item in income from continuing operations.

37

Re-measurement, based on the temporal method of conversion, converts foreign currency amounts to reporting currency amounts using different exchange rates for different accounts based on which of the following distinctions?
A. Current and non-current.
B. Monetary and non-monetary.
C. Asset and liability.
D. Income statement and balance sheet.

B. The distinction used for applying different exchange rates to different accounts when using re-measurement is based on whether the account is monetary or non-monetary.

38

T/F: If the U.S. dollar is the functional currency of a foreign entity, the financial statements of that entity are prepared initially in the local foreign currency.

True

39

T/F: After all items on the financial statements of the foreign entity have been re-measured appropriately to financial statements expressed in dollars, the dollar-based balance sheet will not balance without the re-measurement adjustment.

True

40

T/F: The re-measurement process of converting financial statements applies different currency exchange rates to monetary items (accounts) than to non-monetary items.

True

41

If the functional currency of a foreign subsidiary is a foreign currency other than the subsidiary's recording currency, which one of the following will be used to convert the subsidiary's financial statements to the final reporting currency?
A. Translation.
B. Re-measurement.
C. Translation and then re-measurement.
D. Re-measurement and then translation.

D. Re-measurement and then translation would be used to convert to the reporting currency when a foreign currency other than the foreign subsidiary's recording currency is the functional currency. Specifically, the financial statements would be re-measured from the recording currency to the other foreign functional currency, and the re-measured financial statements would then be translated to the reporting currency

42

T/F: A currency other than the recording currency or the reporting currency can be the functional currency for a foreign entity.

True

43

T/F: If a currency other than the recording currency or the reporting currency is the functional currency, both the translation and the re-measurement processes will be used.

True

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