M5-2

The accounts of a foreign subsidiary are translated into the parent's currency using a combination of

current and historical exchange rates.

The functional currency of a foreign entity located in a highly inflationary country

does not need to be identified because the entity's foreign currency financial statements must be translated using the temporal method.

The net asset balance sheet exposure related to a French subsidiary can be hedged with a

euro note payable.

The functional currency of a foreign entity is defined as the

primary currency of the foreign entity's operating environment.

Under the temporal method, a gain on the sale of land in foreign currency (FC) is translated into parent company currency by multiplying the cash proceeds from the sale in FC by the exchange rate in effect on the date of sale and

subtracting the product of multiplying the cost of the land in FC by the exchange rate in effect when the land was acquired.

Under the current rate method of translation, revenues and expenses generally are translated at

the average-for-the-perod exchange rate.

Under the temporal method, expenses are translated using

the average-for-the-year and historical exchange rates.

Under the temporal method of translation, assets carried on the foreign entity's balance sheet at a current or future value are translated using

the current exchange rate.

Locations in the financial statements where companies typically present an analysis of the change in cumulative translation adjustment includes

the statement of comprehensive income. the notes to financial statements.

Under both IFRS and U.S. GAAP, the cumulative translation adjustment related to a foreign subsidiary and the cumulative gain or loss on the net investment hedge of that subsidiary are transferred from accumulated other comprehensive income to net income

when the foreign subsidiary is sold.

True or false: Under the temporal method, inventory reported at cost on the foreign currency balance sheet could be reported at either cost or at net realizable value on the parent currency balance sheet.

True

Under the temporal method of translation, balance sheet accounts translated at the current exchange rate include

accounts and notes payable. cash and receivables.

There is no need to keep record of the acquisition date exchange rates related to

assets translated at the current exchange rate under the temporal method. assets translated under the current rate method.

Sales revenue recognized evenly throughout the year by a foreign subsidiary should be translated under the current rate method using the

average

The exchange rate is the exchange rate that exists at the balance sheet date.

current

Under the temporal method of translation, balance sheet accounts translated at historical exchange rates include

equipment, buildings, and land. common stock and additional paid-in capital.

Under the temporal method of translation, foreign entities generally will

have a net liability balance sheet exposure.

The exchange rate is the exchange rate that existed when a transaction occurred sometime in the past.

historical

Consistent with the underlying assumption of the current rate method that the net investment in a foreign operation is exposed to foreign exchange risk, all assets and liabilities of the foreign operation are translated into parent company currency using the exchange rate.

current

Assets translated using a different exchange rate under the current rate method than under the temporal method include

property, plant and equipment. intangible assets.

A net asset balance sheet exposure exists when

the amount of assets translated at the current exchange rate is higher than the amount of liabilities translated at the current exchange rate.

The indicators provided by the FASB for determining the functional currency of a foreign entity include

the currency in which the foreign entity obtains its financing. whether the foreign entity's cash flows directly affect the parent's cash flows. whether sales prices are directly affected by short-term fluctuations in the exchange rate.

In translating the financial statements of a foreign entity located in a hyperinflationary economy, IFRS requires

the foreign financial statements to be restated for inflation and then all restated balances are translated at the current rate.

Under both the current rate and temporal methods of translation the parent currency amount of retained earnings at the end of the year is determined by translating the

current year's net income and dividends in foreign currency separately and combining these with beginning retained earnings.

Under the temporal method, cost of goods sold (COGS) in foreign currency is decomposed into beginning inventory, purchases, and ending inventory and then each component is translated into U.S. dollars using the appropriate exchange rate.

historical

Under the temporal method, depreciation expense and accumulated depreciation are translated using the exchange rate when the related property, plant, and equipment was acquired.

historical

Determining the functional currency of a foreign subsidiary

is a matter of fact but may require management judgment in evaluating the facts.

Comparability of financial statements across companies within an industry is made more difficult by

some companies identifying local currencies as functional currency and other companies identifying the U.S. dollar as functional currency.

In applying the equity method, the current year's negative translation adjustment calculated by reference to changes in net assets and a depreciation in the foreign currency

is recognized as a credit to the Investment in Foreign Subsidiary account.

Balance sheet exposure under the current rate method of translation is equal to a foreign operation's

net asset position.

Current U.S. GAAP recognizes that some foreign entities

are relatively self-contained and integrated with the local economy and therefore primarily conduct business using foreign currency. are closely integrated with their parent company and therefore primarily conduct business using parent company currency.

In consolidating a foreign subsidiary, the current translation adjustment on the excess of fair value over book value related to that foreign subsidiary must be

recognized through an adjusting entry on the consolidation worksheet.

When an asset carried at historical cost on a foreign currency balance sheet is remeasured into parent company currency using the temporal method the resulting parent currency balance for that asset

represents the historical cost of the asset in parent currency.

Current U.S. GAAP recognizes that

some foreign entities primarily conduct their operations in parent company currency. some foreign entities primarily conduct their operations in foreign currency.

In calculating the translation adjustment when the current rate method is used, the focus is on determining the impact that exchange rate changes have on

the beginning balance and changes in net assets.

A U.S.-based company has a foreign subsidiary that has the Mexican peso as its functional currency. The Mexican subsidiary recognizes in its Mexican peso income statement a foreign exchange gain on a Colombian peso account receivable. In preparing its consolidated income statement, the U.S. parent company should translate the Mexican subsidiary's foreign exchange gain into U.S. dollars using the

average-for-the-year exchange rate between the Mexican peso and U.S. dollar.

In determining remeasurement gains and losses under the temporal method, the focus is on determining the impact that exchange rate changes have on the

beginning balance and changes in net monetary assets and liabilities.

A basic objective of the temporal method of translation is to

produce a set of translated financial statements as if the foreign operation had used the parent company's currency in its daily operations.

Translation adjustments included in other comprehensive income are

accumulated in a stockholders' equity account on the consolidated balance sheet.

Net cash from operations reported in the translated statement of cash flows

will be the same regardless of whether the current rate method or temporal method is used.

The functional currency of a foreign entity

can be either a foreign currency or the currency of the country in which the parent is located.

The net asset balance sheet exposure of a foreign entity can be hedged using a

foreign currency forward contract. foreign currency note payable. foreign currency option.

The current rate method of translation assumes that a foreign subsidiary is

a net asset that is exposed to foreign exchange risk.

The translation adjustment that results from the use of the temporal method is a realized (cash) gain or loss that is caused by changes in exchange rates.

False

The current year's translation adjustment related to a foreign subsidiary is recognized as an adjustment to the Investment in Foreign Subsidiary account on the parent company's books.

True

In consolidating a foreign subsidiary, the excess of fair value over book value must be translated into the parent's currency and

a translation adjustment related to the excess must be recognized in the consolidation worksheet.

The cumulative translation adjustment related to a specific foreign subsidiary is reported on the parent company's separate balance sheet

and on the foreign subsidiary's translated balance sheet.

The translation adjustment calculated as the balancing amount in a translated balance sheet using the current rate method is the translation adjustment.

cumulative

One of the consolidation worksheet entries used to eliminate the investment in subsidiary account must

eliminate the amount of cumulative translation adjustment that is included in the investment account.

In applying the equity method to account for the investment in a foreign subsidiary, the current year's positive translation adjustment calculated by reference to changes in net assets and an appreciation in the foreign currency is

recognized as a credit to the Cumulative Translation Adjustment account on the parent company's books.

Under the temporal method, revenues that are earned evenly throughout the year are translated using

the average-for-the-year exchange rate.

Determining the functional currency of a foreign entity might require management to exercise considerable judgment in considering relevant facts.

True

Net cash from operations reported in the translated statement of cash flows will be the same regardless of whether a foreign entity's financial statements have been translated using the current rate method or remeasured using the temporal method.

True

A U.S.-based company must use the current rate method to translate the financial statements of a foreign subsidiary whose functional currency is

a foreign currency.

The translation adjustment arising under the current rate method becomes a realized (cash) gain or loss when

a foreign subsidiary is sold and the sales proceeds are converted into parent company currency.

Balance sheet accounts translated using the same exchange rate under both the current rate and temporal methods include

cash and receivables. long-term debt. additional paid in capital.

The use of different functional currencies by companies in the same industry distorts the intra-industry of financial statements.

comparability

The translation adjustment arising under the current rate method becomes a realized gain or loss when the foreign subsidiary is sold and the foreign currency proceeds from the sale are into U.S. dollars.

converted

When the temporal method of translation is used, inventory carried at foreign currency cost on the foreign entity's balance sheet under the lower of cost or net realizable value rule

could be carried at net realizable value in parent currency on the parent's consolidated balance sheet. could be carried at cost in parent currency on the parent's consolidated balance sheet.

Exposure to translation adjustment exists for those foreign currency balances that are translated at

the current exchange rate.

The Canadian subsidiary of a U.S.-based company has an account receivable in British pounds. To report this account receivable in the U.S.-parent's consolidated balance sheet, the

British pound receivable should translated into Canadian dollars using the current exchange rate. the Canadian dollar translated amount for the British pound receivable should be translated into U.S. dollars using the current exchange rate.

When the amount of assets translated at the current exchange rate is lower than the amount of liabilities translated at the current exchange rate

a net liability balance sheet exposure exists.

Under the current rate method of translation, the balance sheet items translated at the current exchange rate are

all assets and all liabilities.

Under the current rate method of translation,

all liabilities are translated at the current exchange rate.

To determine whether a country has a hyperinflationary economy, IFRS

does not provide a specific threshold but instead provides a list of indicators indicative of hyperinflation.

When the temporal method is used, the financial statement items of a foreign entity are said to be into parent company currency.

remeasured

The methods used in valuing assets on the foreign currency financial statements of a foreign entity are maintained in the translated parent company currency financial statements when

the temporal method is used to translate the foreign financial statements.

Translating a foreign currency balance sheet account at the current exchange rate gives rise to

balance sheet exposure to foreign exchange risk.

Under the temporal method, cost of goods sold (COGS) in foreign currency (FC) is translated into parent company currency by

decomposing COGS in FC into components and then multiplying each of these components by its appropriate historical exchange rate.

The accounting system must keep track of the acquisition date exchange rates related to those assets that are translated at

historical exchange rates under the temporal method.

Under the temporal method of translation, assets carried on the foreign entity's balance sheet at historical cost are translated using

historical exchange rates.

The functional currency of a foreign entity is the U.S. dollar. The gain on forward contract designated as a hedge of the net investment in this foreign entity should be reported

in net income in the consolidated income statement.

Conceptually, translation adjustments that result from applying either the current rate method or the temporal method could be

included in consolidated other comprehensive income as a deferred translation gain or loss. included in consolidated net income as a translation gain or loss.

The foreign currency financial statements of a foreign entity located in a highly inflationary economy

must be translated using the temporal method.

Some of the ratios calculated from a foreign entity's foreign currency financial statements will have the same value in parent company currency when the foreign financial statements are translated using

the current rate method.

Under the current rate method of translation, a gain on the sale of land should be translated at

the exchange rate on the date the land was sold.

Each of the ratios calculated from a foreign entity's foreign currency financial statements will have a different value in parent company currency when the foreign financial statements are translated using

the temporal method.

Under both the current rate and temporal methods of translation the retained earnings of a foreign entity are translated into parent company currency by multiplying ending retained earnings in foreign currency by the average-for-the-period exchange rate.

False

Translating a liability on a foreign subsidiary's balance sheet at the current exchange rate results in

a negative translation adjustment when the foreign currency has appreciated. a positive translation adjustment when the foreign currency has depreciated.

A depreciation in the value of a foreign currency will result in a negative translation adjustment when a foreign subsidiary has a net balance sheet exposure.

asset

In determining the remeasurement gain or loss that results when the temporal method is used, the beginning-of-the-year net monetary asset or liability position of the foreign entity is translated using the

beginning-of-the-year exchange rate.

In determining the translation adjustment when the current rate method is used, the foreign entity's net asset balance at the beginning of the year is translated using the

beginning-of-the-year exchange rate.

The translation adjustment that results from applying the temporal method

can be realized in cash only if the foreign entity's liabilities are paid using parent company currency.

Under the temporal method of translation, a foreign entity

can have a net asset or a net liability balance sheet exposure.

The gain on the sale of an asset is translated under the temporal method by first translating the received from the sale using the exchange rate on the date of sale.

cash

A company reports a negative translation adjustment in year 1 and an even larger negative translation adjustment in year 2. In aggregate, the foreign currencies in which the company primarily operates must have

depreciated in year 2 by a larger amount than they depreciated in year 1.

Assuming that all expenses are incurred evenly throughout the year, those expenses translated using a different exchange rate under the current rate method than under the temporal method include

depreciation expense. cost of goods sold.

In determining the translation adjustment when the current rate method is used, dividends declared by the foreign entity in the current year are translated using the

exchange rate on the date the dividends are declared.

Under the current rate method of translation,

expenses incurred evenly throughout the year are translated at the average-for-the-year exchange rate. revenues generated evenly throughout the year are translated at the average-for-the-year exchange rate.

A positive translation adjustment will arise when a foreign currency decreases in value (depreciates) and the foreign subsidiary

has a net liability balance sheet exposure.

Under the temporal method, expenses related to assets that are translated at historical exchange rates (such as depreciation expense) are translated using

historical exchange rates.

The functional currency of a foreign entity is the currency of the country in which the entity is located. A gain on forward contract designated as a hedge of the net investment in this foreign entity is reported

in accumulated other comprehensive income on the consolidated balance sheet.

A company reports a negative cumulative translation adjustment of $200 at the beginning of the year and a positive cumulative translation adjustment of $100 at the end of the year. All of the company's foreign operations have a foreign currency as their functional currency. In aggregate, the foreign currencies in which the company primarily operates must have

increased in value (appreciated) in the current year.

A net liability balance sheet exposure coupled with an appreciation in the value of a foreign currency will result in a translation adjustment.

negative

An analysis of the change in cumulative translation adjustment may be presented in the

notes to financial statements.

Translating a foreign currency asset at the current exchange rate when the foreign currency has appreciated gives rise to a translation adjustment.

positive

In determining the functional currency of a foreign subsidiary, IFRS

provides a hierarchy of primary and other factors to be considered.

In assessing the indicators provided by the FASB for determining the functional currency of a foreign entity, the FASB

provides no guidance with regard to how the indicators should be weighted.

When the gain on the financial instrument used to hedge a net investment in foreign operation exceeds the translation adjustment being hedged, the difference is

recognized as a gain in net income.

Consistent with the basic objective of the temporal method, land held on the balance sheet of a foreign subsidiary should be translated into the parent company's currency so that the translated amount

reflects the amount of parent company currency that would have been paid to acquire the land.

Similar to U.S. GAAP, IFRS requires the gain or loss on a financial instrument used to hedge a net investment in foreign operation to be

reported in accumulated other comprehensive income along with the translation adjustment being hedged.

When the current rate method of translation is appropriate, the resulting translation adjustment must be

reported in accumulated other comprehensive income on the balance sheet.

Translation using the temporal method with remeasurement gains and losses recognized in net income is appropriate for those foreign entities

that are located in highly inflationary economies. that have the U.S. dollar as their functional currency.

A U.S.-based company must use the temporal method to translate the financial statements of a foreign subsidiary whose functional currency is

the U.S. dollar.

In translating foreign currency financial statements into parent company currency using the current rate method, a translation adjustment can be calculated as a balancing amount. This balancing amount is

the cumulative translation adjustment.

Under the temporal method, depreciation expense and accumulated depreciation on property, plant, and equipment are translated

using the historical exchange rate when the property, plant, and equipment was acquired.