International Accounting Exam 1

What is double taxation and how do we try to compensate that this not happen?

Double taxation is a taxation principle referring to income taxes paid twice on the same source of earned income. Double taxation occurs in international trade when the same income is taxed in two different countries. To avoid these issues, countries around the world have signed hundreds of treaties for the avoidance of double taxation, often based on models provided by the Organization for Economic Cooperation and Development (OECD). In these treaties, signatory nations agree to limit their taxation of international business in an effort to augment trade between the two countries and avoid double taxation.

When should goodwill be recognized?

As an expense when incurred for US GAAP. For IFRS, only if they meet the following criteria: a. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and b. the cost of the asset can be measured reliably.

What rates should be used in the current rate method of translation?

Assets and liabilities are translated at current exchange rates and the income statement is translated using the weighted-average exchange rate observed over the reporting period.

Under both IFRS and U.S. GAAP, in an equity-settled share-based payment transaction, how are such payments to non-employees measured?

At the fair value of goods or services received, if a reliable determination is available otherwise, the fair value of the equity instrument.

Prepare the journal entries for a sales transaction in a foreign currency.

Date of sale, A/R-D $ Sales-C $ ($ x rate) Close books, A/R-D $ Foreign Exchange Gain-C $ (Difference of 1st and 2nd rate x price) Payment received, Cash-D $ A/R-C $, Foreign Exchange Loss-D $ A/R-C $ (2nd rate - 3rd rate x price)

Under IFRS, which of the following terms describes the removal of a financial asset or liability from the balance sheet when certain appropriate criteria have been met?

Derecognition

What is a foreign currency transaction?

Foreign currency transaction is the term used to describe all operations conducted by businesses or individuals that are denominated in a currency other than a company's functional currency. A foreign-currency transaction is one that requires settlement, either payment or receipt, in a foreign currency.

Why does a company incur a foreign exchange gain? Loss?

Foreign exchange gains and losses or FX gains and losses is an accounting concept referring to the impact of foreign exchange risk in the financial statements of businesses' monetary assets and liabilities denominated in currencies other than their functional currency. The differences in the value of those monetary assets and liabilities at the settlement date are registered in the books as foreign exchange gains and losses.

According to IFRS, with respect to onerous contracts, a provision should be recognized for

the lower of cost of fulfillment or the penalty from non-fulfillment of the contract.

IFRS defines a financial instrument as?

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Under IFRS, how should deferred taxes be classified on the balance sheet?

As always a noncurrent asset or a noncurrent liability.

What is a pegged rate?

A pegged exchange rate, also known as a fixed exchange rate, is where the currency of one country is tied to a usually stronger currency. The purpose of this is to attempt to maintain the currency's value, keeping it at a "fixed" rate and to avoid exchange rate fluctuations.

What is a tax haven?

A tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment.

What is a tax holiday?

A temporary reduction or elimination of a tax.

How is the translation adjustment recorded with the temporal method?

All foreign exchange gains and losses are reported in net earnings of the parent company. This can increase the volatility of the parent company's earnings.

How does U.S. GAAP require prior service costs related to retirees to be recognized?

Amortize over remaining expected life of the retirees.

What is a cash flow hedge?

A cash flow hedge is a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a particular risk.

What is a fair value hedge?

A fair value hedge is an investment position taken by a company or an investor aiming to protect the fair value of a specific asset, liability or unrecognized company commitment from risks that can affect their profit and loss accounts.

What is a floating interest rate?

A floating interest rate is an interest rate that moves up and down with the rest of the market or along with an index.

What is a forward rate?

A forward rate is an interest rate applicable to a financial transaction that will take place in the future. It may also refer to the rate fixed for a future financial obligation, such as the interest rate on a loan payment.

How does a company hedge balance sheet exposure?

Balance sheet hedges document and translate foreign assets into U.S. dollars as protection against currency fluctuations, allowing companies to control currency transactions.

What is the difference between a subsidiary and a branch?

Branches are a part of the parent organization, which are opened to perform the same business operations as performed by the parent company, to increase their reach. A subsidiary company is a company, whose controlling stake is held by another entity, i.e. the holding company.

What group or who is responsible for determining the functional currency of a foreign subsidiary?

Company management for US GAAP

What is a contingent asset/liability?

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. Contingent assets is a probable asset, arising from past events, whose existence is yet to be confirmed definitively by a future event.

What is meant by translation of foreign currency financial statements?

Converting financial statements of a foreign currency into a domestic currency

Record the entries of a forward contract as a fair value hedge of a foreign currency receivable.

Date of Purchase, Inventory-D $ A/P-C ($ x spot rate) No formal entry for forward contract Adjusting Entry, Foreign Exchange Loss-D $ A/P-C $ (Change in spot rate x $) Forward Contract-D $ Gain on Forward Contract-C $ (Change in forward rate x $ x PV factor) Payment, Foreign Exchange Loss-D $ A/P-C $ (Change in spot rate 2-3 x $) Loss on forward contract-D $ Forward Contract-C $ (Change in fair value) Foreign Currency-D $ Forward Contract-C $ Cash-C $ ($ x ending spot rate, forward contract fair value, difference is cash) Accounts payable-D $ Foreign currency-C $ ($ x final spot rate)

What is a disappearing plant?

High inflation can result in extreme decreases in the reported amounts for foreign fixed assets.

How and when are foreign exchange gains or losses recorded?

If there is a change in the expected exchange rate between the functional currency of the entity and the currency in which a transaction is denominated, record a gain or loss in earnings in the period when the exchange rate changes. The first translation occurs when the asset or liability is created, the second time when it is settled, and the third translation occurs at year end, as companies are required to translate monetary assets or liabilities using the year end spot rate.

Determine the translation method the US company should use, what is the dollar amount of the translation adjustment, which financial statement and section of the financial statement will the translation adjustment be on, is the translation adjustment a positive or a negative?

Income Statement - Average rate Balance Sheet - Date of balance sheet Net income year 1 - Net income from income statement. Capital stock - date of activity Adjustment negative because of the rate decreasing - net assets position has decreased in value when translated.

Under IFRS, which of the following is NOT a definition of a current liability?

It is a liability that does not have the right to defer until 18 months after the balance sheet date.

Which of the following inventory valuation methods commonly used in the U.S. is NOT allowed under IFRS?

LIFO

What rates should be used in the temporal method of translation?

Monetary assets such as accounts receivable, investments, and cash are converted to the parent's currency at the exchange rate in effect on the balance sheet date. Non-monetary assets are longer term assets, such as property, plant, and equipment, and are converted using the exchange rate in effect on the date the asset was obtained.

What are acceptable methods to translate statements under US GAAP?

Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not

What is VAT?

The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services.

How is the translation adjustment recorded with the current rate method?

The balance sheet has to be re-balanced as a result of this accounting procedure. The Cumulative Translation Adjustment (CTA) is used as a plug-in figure that nets out the asset side of the balance sheet with the liabilities and equity side. The CTA is treated as an unrealized gain or loss, which can subsequently be realized when the foreign subsidiary is sold or impaired.

How does the US tax a branch?

The branch profits tax is a branch-level tax on the repatriation of earnings, in the form of dividends, from a foreign corporation's branch in the United States to the home office in the foreign country. The tax is also applied to excess interest on US effectively connected income.

What is the current rate method of translation?

The current rate method is a method of foreign currency translation where most items in the financial statements are translated at the current exchange rate.

Explain what the cumulative translation adjustment is and why the cumulative translation adjustment is a positive or negative on the balance sheet.

The exposure on the balance sheet exists because every asset is translated at the current exchange rate which ends up exceeding the total amount of the liabilities. A cumulative translation adjustment (CTA) is an entry in the comprehensive income section of a translated balance sheet summarizing the gains/losses resulting from varying exchange rates over time.

How does the US tax a foreign subsidiary?

The income is not taxed if it stays within the foreign subsidiary, but when it is paid to the U.S. parent company, a 35 percent corporate tax rate applies.

Under IFRS, what adjustment needs to be made after an inventory write-down if the selling price subsequently increases?

The inventory write-down should be reversed to bring it in line with the new net realizable value

What is balance sheet exposure?

The risk that a company may suffer a reduction in value because a change in exchange rates reduces the value of its accounts or assets denominated in foreign currencies. That is, if a particular currency in which a company has some assets denominated decreases in value, the value of those assets also decreases with respect to the company's main currency.

What is a spot rate?

The spot rate is the exchange rate for a currency at the current time or in a foreign currency transaction, the rate of exchange at which the transaction will be made on a specified date.

What is the temporal method of translation?

The temporal method (also known as the historical method) is a method of foreign currency translation that uses exchange rates based on the time assets and liabilities are acquired or incurred to convert values on the books of an integrated foreign entity into the parent company's currency.

How are intangible assets unlike other assets per IFRS?

They are non-monetary and lack physical substance.

How does US GAAP handle translating subsidiary in a hyperinflationary country?

They mandate the use of the temporal method with translation gains and losses reported in income.

How do you determine the functional currency under US GAAP?

Through a list of indicators including: cash flow, sales price, sales market, expenses, financing, and intercompany transaction.

What is asset or liability exposure in a foreign exchange transaction?

Translation exposure is a type of foreign exchange risk faced by multinational corporations that have subsidiaries operating in another country. It is the risk that foreign exchange rate fluctuations will adversely affect the translation of the subsidiary's assets and liabilities - denominated in foreign currency - into the home currency of the parent company when consolidating financial statements.

How does IFRS differ from U.S. GAAP with respect to development costs?

U.S. GAAP does not allow capitalization of development costs, whereas IAS 38 allows capitalization of these costs.

How does the US handle unrealized exchange gains or losses?

Unrealized profit or losses refer to profits or losses that have occurred on paper, but the relevant transactions have not been completed. Unrealized income or losses are recorded in an account called accumulated other comprehensive income, which is found in the owner's equity section of the balance sheet. These represent gains and losses from changes in the value of assets or liabilities that have not yet been settled and recognized.

Under U.S. GAAP, when is a deferred tax asset realized?

When realization is more likely than not.