FAR - Specific Transactions, Events, & Disclosures - Conversion of Foreign Financials Flashcards Preview

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Flashcards in FAR - Specific Transactions, Events, & Disclosures - Conversion of Foreign Financials Deck (20)
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1
Q

Conversion of foreign financials

A

Convert foreign financials into domestic currency

1) financials could be of: sub, investee, PTP, JV

2) conversion need to:
- apply equity method
- combine/consolidate with entities/parents

2
Q

Recording currency

A

currency which foreign books/initial financials are prepared

3
Q

Reporting currency

A

currency in which, consolidated, financials are prepared

4
Q

Functional currency****

A

currency of primary economic economic environment in which an entity operates/generates net CFs

  • determines how to convert financials

Possible functional currencies:

1) recording - foreign entity’s local currency
2) reporting currency - currency of final reporting entity
3) another foreign currency - foreign currency other than recording currency

5
Q

functional currency = local recording currency when:

A

1) foreign operations are self-contained/integrated within country in which located
- operations/CFs occur in country of location

EXCEPTION
if local economy = hyperinflation (cumulative inflation % of 100% or more over 3 yr period) - local currency cannot be functional currency
- in that case, reporting currency = functional currency

6
Q

functional currency = reporting currency

A

1) foreign operations = direct/integral component or extension of U.S. entity’s operations
- foreign operation closely tied to U.S. entity
- couldn’t operate independent of U.S. entity

OR

2) local economy = hyperinflation - 100%/+ over 3 yr period

7
Q

TRUE/FALSE

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

A

TRUE

8
Q

highly inflationary (hyperinflationary) economy

A

is one that has experienced a CUMULATIVE inflation of 100% or more over the past 3 years

9
Q

current (or spot) exchange rate

A

exchange rate in effect at the current time (or as close thereto as possible); that is, at the time of the transaction or revaluation

10
Q

Translation Conversion (Current Rate Method)

Use when Functional currency = local/recording currency

A

1) insure foreign financials are according to GAAP - adj if necessary
2) convert most B/S accts using current rate

3) convert income accts - revenues, expenses, gains/losses:
- exchange rate at date item earned/incurred
- weighted avg rate for the period

11
Q

Translation Conversion

Convert B/S Accts

A

1) Assets/Liab using spot (current) rate @ B/S Date
2) PIC using historic rate in existence when paid-in item arose

3) RE = computed:
- BOY RE + Translated I/S - Divs declared @ spot rate = EOY RE

12
Q

Translation Adj.

A

Amount needed to balance the debits/credits

  • item of OCI
  • Flows through to AOCI in O/E Section
13
Q

true/false

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

A

true

14
Q

Remeasurement Conversion

Temporal Method

A

1) insure foreign financials accord to GAAP - adj. is needed

2) convert accts using temporal method:
- monetary items = fixed in dollar value
- non-monetary items = change in dollar value as prices change

3) remeasure monetary items using current rate
- remeasure non-monetary items using historic rate that existed when acct/item arose

15
Q

Remeasurement conversion

Use historic rates for:

A
assets/liab
securities carried @ cost
inv @ cost
prepaid costs
fixed asset/acc. dep
intangible assets/goodwill
deferred/unearned rev
paid-in-capital
rev/exp related to asset/liab
COGS
deprec/amort
16
Q

Remeasurement conversion

use current rates for:

use W/A for?

A

current:
- all other monetary asset/liab

W/A:
- rev/exp occurred evenly yr round

17
Q

remeasurement Adj

A

remeasured TB doesn’t balance

Amount need to balance = remeasurement adj.

  • recognize as gain/loss in income statement
  • Flows to RE
18
Q

Conversions using both remeasurment & translation

Functional Currency = another foreign currency

A

1) Remeasure from local recording currency to functional currency
2) translate resulting financial statement from functional currency to reporting currency

  • 2 conversion adj
    1) Remeasurement - I/S
    2) Translation - OCI
19
Q

Remeasurement & Translation GAAP vs IFRS

A

GAAP:

1) FC based on primary economic activities
2) Equity translated @ historic rates
3) Hyperinflationary statements remeasured as if reporting = FC

IFRS:

1) FC = based on primary/secondary indicators
2) No guidance on what rate to use
3) hyperinflationary statements indexed to GPL and then translated to reporting currency

20
Q

true/false

Under the translation method of converting, income statement items are converted using the average exchange rate for the period

A

true

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