FAR - Foreign Currency Flashcards Preview

FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) > FAR - Foreign Currency > Flashcards

Flashcards in FAR - Foreign Currency Deck (16):
1

What is the difference between

a) Foreign Currency Transaction

and

b) Foreign currency translation

Foreign Currency Transaction = transactions with Foreign entity (buying and selling) denominated in Foreign Currency (using Foreign money not using US $ dollars) REPORTED in Income statement.

Foreign currency translation = Conversion of Foreign Entity's financial statements into Financial statements expressed in Domestic currency (US dollars)
--> Report any Currency Translation gain (and loss) in Accumulated Other Comprehensive Income in Stockholders' equity.

2

Consolidated Financial statements that shows results and relationships fo affilaited entities is reported in the currency of primary economic environment in which the entity operates in or also known as _____________.

Functional currency

3

What is Current exchange rate?

What is the other name for Current Exchange Rate?

Current exchange rate = Exchange rate on the current date or for Immediate delivery on currency.

Another name: Spot rate.

4

Reporting Currency

and

Functional Currency

Reporting Currency = currency that is used to report the Financial statements of foreign entity (Parent company's currency).

Functional currency = Currency in the primary economic environment in which entity operates

It can be Local currency or reporting currency.

5

Foreign currency translation


Foreign currency remeasurement

Foreign currency Translation: restatement of financial statements denominated in the functional currency to the reporting currency using appropriate rates of exchange.

(Change from Functional Currency to Reporting currency on Financial statements. Consolidated financial statements use Reporting currency)

Foreign currency re-measurement = the restatement of foreign financial statements from the foreign currency to the entity's functional currency.


Re measurement applies in the following situations:

Situation 1: The reporting currency is the functional currency.

Or: Foreign Sub company uses Foreign currency --> Then: Remeasure foreign currency To: parent company's functional currency (reporting currency)

Situation 2: The financial statements must be restated in the entity's functional currency prior to translating the financial statements from the functional currency to the reporting currency.

Foreign Subsidiary used Foreign currency for its reporting
Then: Foreign Subsidiary remeasure its F/S from foreign currency to Functional currency (sub company)
Then: Translate to Parent Company's Reporting Currency

6

How to determine functional currency?

The functional currency can be the entity's:
* Local currency,
* Reporting entity's (parent company's) the currency
* OR: or the currency of another country.

Under U.S. GAAP, an entity's local currency qualifies as the functional currency if it is the currency of the primary
economic environment in which the company operates, and all of the following conditions exist:

a. The foreign operations are relatively Self-Contained and Integrated within the country.

b. The Day-to-Day operations do NOT depend on the parent's or investor's functional currency.

c. The local economy of the foreign entity is NOT highly inflationary, which is defined as cumulative inflation of 100% over three years.

7

IFRS rules on factors to determine entity's function currency:

What are the first 3 factors that have priority over other factors?

What are the rest of the factosr?

The first three factors have priority over the other factors:

• The currency that influences sales prices for goods and services.
• The currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services.
• The currency that mainly influences labor, material, and other costs of providing goods and services.

Other Factors
-----------------------------
• The currency in which funds from financing activities are generated.
• The currency in which receipts from operating activities are usually retained.
• Whether the activities of the foreign operation are an extension of the parent's activities or are carried out with a significant amount of autonomy. Whether transactions with the parent are a large or small portion of the foreign entity's activities.
• Whether cash flows generated by the foreign operation directly affect the cash now of the parent and are available to be remitted to the parent.

8

The remeasurement method must be used when??

The re-measurement method must be used when:

• The foreign subsidiary is highly integrated
with the parent and serves primarily as a sales outlet for the parent. Day-to-day operations of the subsidiary DEPEND on
the reporting currency. (Other words: not self-contained, not integrated with Country. Depends a lot on parent company).

• The foreign subsidiary operates on a highly inflationary economy.

9

When the foreign currency is the functional currency and the translation method must be used when???


• The foreign subsidiary is relatively self-contained and independent and operates primarily In local markets,

Day-to-Day operations of the subsidiary do NOT
depend on the reporting currency.

10

When do you remeasure from local currency to functional currency AND THEN translate from Functional Curerncy to reporting currency?



the subsidiary's financial statements must

first be remeasured from the local currency

to the functional currency, and then must be

translated from the functional currency to

the reporting currency.

When Subsidiary's functional currency differs from both the subsidiary's local currency and the reporting currency.

Other words:

Foreign subsidiary highly used its own Foreign currency (that's highly inflated and entity is not self-contained/independent etc. etc.)

Then: Remeasure foreign sub's foreign currency to Functional currency

And then: translate Functional Currency to Reporting currency (parent company's currency)

11

Remeasurement Method (temporal method)
---------------------------------------

If the Foreign Subsidiary's financial statements of the not in the subsidiary's functional currency, then remeasure the financial statements to Functional currency starting with what financial statement?

(1) Balance Sheet
Monetary items = Use what rate?
Non-monetary items = Use what rate?

(2) Income Statement
Non-balance sheet related items = use what rate?
Balance sheet related items = use what rate?
- Depreciation/PP&E
- Cost of goods sold/inventory
- Amortization/bonds and intangibles

(3) Plug "Currency Gain/Loss" to get net income to the required amount needed to adjust ___ ___ in order to make the balance sheet balance.

a. Remeasurement Method (temporal method)

If the Foreign Subsidiary's financial statements of the not in the subsidiary's functional currency, then remeasure the financial statements to Functional currency starting with the BALANCE SHEET.

(1) Balance Sheet
Monetary items = Current/Year-end rate
Non-monetary items = historical rate

(2) Income Statement
Non-balance sheet related items = Weighted average rate
Balance sheet related items = Historical rate on below:
- Depreciation/PP&E
- Cost of goods sold/inventory
- Amortization/bonds and intangibles

Plug "Currency Gain/Loss" to get net income to the required amount needed to adjust RETAINED EARNINGS in order to make the balance sheet balance.

12

Translation Method (current rate method)
----------------------------------------------------

Another word for translation is to ____ functional currency currency to reporting currency

If foreign subsidiary's F/S are in sub's Functional currency (foreign currency = functional currency), then foreign sub's F/S are to be translated to the ____ currency starting with what financial statement?

(1) Income Statement
All income statement items = use what rate?

Transfer net income to where?

(2) Balance Sheet
Assets = use what rate?
Liabilities = use what rate?
Common stock/APIC = use what rate?
Retained earnings = what to do with this?

Translated retained earnings is =
Beginning Translated Retained earnings
+ Translated __ ___ for current period
- Translated ____ declared for current period.

(3) Translation Gain or Loss (other comprehensive income)

Plug "translation adjustment" to __ ___ Income.

The translation adjustment is equal to the difference between the debits and credits in the translated trial balance. (Or: ____ - ____ on translated trial balance).

Translation Method (current rate method)
----------------------------

Another word for translation is to CONVERT functional currency currency to reporting currency

If foreign subsidiary's F/S are in sub's Functional currency, then foreign sub's F/S are to be translated to the REPORTING currency starting with INCOME STATEMENT.

(1) Income Statement
All income statement items =Weighted average rate

Transfer net income to Retained Earnings

(2) Balance Sheet
Assets = Current Iyear-end rate
Liabilities = Current Iyear-end rate
Common stock/APIC = Historical rate
Retained earnings = Roll forward

Translated retained earnings is =
Beginning Translated Retained earnings
+ Translated Net income for current period
- Translated Dividends declared for current period.

(3) Translation Gain or Loss (other comprehensive income)

Plug "translation adjustment" to Other Comprehensive Income.

The translation adjustment is equal to the difference between the debits and credits in the translated trial balance.

(Or: Translation Adjustment = Debits - Credits on translated trial balance).

13

How to calculate the Weight average rate using the following data?

Exchange rates for the LCU were as follows:

December 31, Year 1 to March 31, Year 2 $0.18
April 1, Year 2 to June 30, Year 2 $0.13
July I. Year 2 to September 30. Year 2 $0.10
October 1, Year 2 to December 31, Year 2 $0.10

[$0.18 + 0.13 + 0.10 + 0.10] / 4
= 0.51 / 4
= 0.1275

14

How to find the Transaction gain or loss from a forward contract with the following data below?

On Dec 12 Y1, company bought 200,000 francs in 90 days and:

Spot Rate Forward rate
Dec. 12, Y1 $0.88 $0.90
Dec. 31, Y1 $0.98 $0.93


$0.93 - 0.90 = $0.03

Then: $0.03 x 200,000 francs

= $6,000

15

Foreign currency transaction not settled:

Then: calculate Gain or Loss on year-end income statement via calculate the rate on which two dates x Currency amount?


Foreign currency transaction is settled (payment is collected):

Then: calculate Gain or Loss on year-end income statement via calculate the rate on which two dates x Currency amount?

Foreign currency transaction not settled:

Transaction date Exchange Rate
- Year-end Exchange rate
------------------
= Difference
x Currency amount
------------------
= Gain or Loss --> reported on Income Statement

Foreign currency transaction where payment was settled:

Year-End Exchange Rate
- Collection settle date Exchange rate
--------------------
= Difference
x Currency amount
------------------
= Gain or Loss --> reported on Income Statement

16

Foreign currency exchangeable for $1.00

(a) increase or decrease when have a GAIN on collecting collecting receivable

(b) increase or decrease when have a LOSS on collecting a receivable

(c) increase or decrease when have GAIN on paying on a payable

(d)increase or decrease when have LOSS on paying on a payable

Foreign currency exchangeable for $1.00

(A) must Decrease in order to have GAIN on collecting receivable.

Example: 1000 yen on collecting receivable.
Decrease # of Yen to $1.00 (so have more $$) so you have more $$ on collecting receivable where you get a gain.

(Fewer Yen to $1.00 >> More Dollars to get Gain on collect receivable)

(B) Must increase in to have LOSS on collecting receivable.

Ex. 1000 yen on collecting Receivable.
Increase # of Yet to $1.00 (So have less $$) to collect on receivable. Therefore, have Loss.

(More Yen >> Less Dollars to collect on Receivable. Then Loss)

(c) INCREASE when have GAIN on paying on note payable.

Ex. Increase number of Dinar (Arabic currency) then Less $$ money to pay out a Note Payable (or just any payable)

So more Dinar --> Less $$ to pay = Then have Gain on paying payable

(d) DECREASE when have Loss on paying on payable.

Ex. DECREASE number of Dinar (Arabic currency) then MORE $$ money to pay out a Note Payable (or just any payable) so have a loss.

So Less Dinar --> more $$ to pay out on Payable = Report a loss.

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