Far2-4

when revenue is recognized in the different accounting methods

- cash basis: it is recognized when payment is received - accrual basis: it is recognized when earned and measurable - modified cash basis: it is recognized when earned, measurable, and available

In which statement does the entity report its foreign exchange gain?

- translation adjustments or gains and losses are disclosed and accumulated as a component of other comprehensive income in consolidated equity until disposed of. - gains and losses from remeasuring the foreign subsidiary's financial statements from the local currency to the functional currency should be included in "income from continuing operations" of the parent company.

types of foreign currency transactions

-operating transactions (import, export, borrowing, lending, and investing transactions. -forward exchange contracts ( agreements to exchange two different currencies at a specific future date and at a specific rate.

steps in restating foreign financial statements

1) Ensure that the financial statements expressed in the foreign currency were prepared in accordance with GAAP or IFRS as appropriate. if necessary, corrections must be made. 2) determine the functional currency: 3) determine appropriate exchange rates. the functional currency of the foreign entity determines the exchange rates to be used. 4) remeasure and/or translate the financial statements. a) remeasurment method .Dysfunctional b) translation method . Functional/normal

general OCBOA presentation guidelines

1) F/S titles should differentiate the OCBOA F/S from accrual basis 2) required F/S are the equivalent of accrual basis B/S & I/S 3) explain changes in equity accounts 4) statement of cash flow not required 5) disclosures should be similar to GAAP

foreign currency remeasurement

Disfunctional The restatement of foreign financial statements from the foreign currency to the entity's functional currency in the following situations: 1. The reporting currency is the functional currency. 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.

personal financial statements

Documents that provide information about your current financial position. they include 1)Statement of Financial Condition (BS) 2)Statement of Changes in Net Worth (IS)

foreign currency translation

Foreign currency translation is the conversion of financial statements of a foreign entity into financial statements expressed in the domestic currency. (the dollar); it is the restatement of FS denominated in the functional currency to the reporting currency using appropriate rates of exchange. it is Functional

remeasurement method

it is a temporal method. Disfunctional if the financial satement of the foreign subsidiary are not in the subsidiary's functional currency, the financial statements are remeasured to the functional currency starting with the balance sheet. 1. Balance sheet A. Monetary items = current/year end rate = fixed B. Non-monetary items = historical rate = fluctuate 2. Income statement A. Non-balance sheet-related items = weighted average rate B. Balance sheet-related items = historical rate - Depreciation/PP&E, COGS/inventory, amort/bonds and intangibles 3. Gain or loss -> plug "currency gain/loss" to get NI to the required amount needed to adjust RE to make the BS balance

the use of the remeasurement method GAAP vs. IFRS

US GAAP requires the use of the remeasurement method when a foreign subsidiary operates in a highly inflationary economy. under IFRS, the financial statements of a foreign subsidiary operating in a highly inflationary economy must first be restated for the effects of inflation and then must be converted from the foreign currency to the reporting currency using the current/year end rate of all elements of both the balance sheet and income statement.

historical exchange rate

Used for equity The rate in effect at the date of issuance of stock or acquisition of assets.

weighted average rate

Used for income statement Calculated to take into account the exchange rate fluctuations for the period.

a business interest that constitutes a large part of an individual's total assets should be presented in a personal statement of financial condition as ......

as a single amount equal to the estimated current value of the business interest.

current exchange rate

exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate

functional currency

the functional currency of an entity generally depends upon the environment in which the entity generates and expends cash, which may be any of the following three: 1) a foreign entity's local currency, which is typically the one in which the entity keeps its books. 2) the currency in which the financial statements will be presented, which is the currency of th parent company. or 3) a foreign currency other than theo ne in which the foreign entity maintains its books.

income tax basis financial statements

they are prepared based on the methods and principles used to prepare the entity's tax return. special accounting treatment must be given to nontaxable revenues and expenses not reported on the tax return. Nontaxable revenues and expenses may be reported as: 1) separate line items in the revenue and expense sections of statement of revenues and expenses 2) additions and deductions to net income, or 3) disclosure in a note

Factors that are considered in determining the entity's functional currency under IFRS.

under IFRS, several factors must be considered in determining the entity's functional currency. the three primary factors that must be considered are: 1) the currency that influences sales prices for goods and services 2) the currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services. 3) the currency that mainly influences labor, material, and other costs of providing goods and services.

what factors must be considered in determining if an entity's local currency qualifies as the functional currency under GAAP?

under US GAAP, an entity's local currency qualifies as the functional currency if is the currency of the primary economic environment in which the company operates, and all of the following conditions exist: 1) the foreign operations are relatively self contained and integrated within the country 2) the day to day operations don't depend on the parent's or investor's functinal currency 3) the local economy of the foreign entity is NOT highly inflationary, which is defined as cumulative inflation of 100% over three years.

translation method

it is current rate method. Functional if the financial statements of the foreign subsidiary are in the subsidiary's functional currency, the financial statements are translated to the reporting currency starting with the income statement. 1. Income statement A. All income statement items = weighted average rate B. Transfer NI to RE 2. Balance sheet A. Assets = current/year end rate B. Liabilities = current/year end rate C. Common stock/APIC = historical rate D. RE = roll forward E. Translated RE = beginning translated RE + translated NI for the current period - dividends declared for the current period 3. Translation gain or loss = OCI A. Cumulative translation adjustment = plug

statement of financial condition

it is the basic personal financial statement. (it is like balance sheet). It presents assets and liabilities at estimated current values rather than at historical cost. assets and liabilities are recognized on the accrual basis versus the cash basis, and personal net worth is the difference between total assets and liabilities included in the statement. the presentation of assets and liabilities is made in order of liquidity and maturity, with no current and non current classifications.

exchange rate

it is the price of one unit of a currency expressed in units of another currency. the exchange rate may be expressed as: 1) direct method: it is the domestic price of one unit of another currency. eg. one euro = $1.47 2) indirect method: is the foreign price of one unit of the domestic currency. eg. $1 = 0.68 euro

OCBOA

other comprehensive basis of accounting - The cash basis and modified cash basis - the tax basis - a definite set of criteria with substantial support - a regulatory basis of accounting

forward exchange rate

the agreed-upon exchange rate to be used in a forward trade

cash basis financial statements

Include: 1) Statement of Cash and Equity: cash is the only asset, no liabilities, and equity is equal to cash 2) Statement of Cash Receipts and Disbursements

modified cash basis financial statements

It is a hybrid method that includes elements of both cash basis and accrual basis of accounting. it include a statement of assets and libilities, and a statement of revenues and expenses and retained earnings. Common modifications include capitalizing and depreciating fixed assets, accrual of income taxes, recording liabilities, capitalizing inventory, recognizing unrealized gains and losses (still

foreign currency transactions

One that requires settlement in a currency other than the entity's functional currency. A foreign currency transaction gain or loss is produced from redeeming receivables/payables that are fixed in terms of amounts of foreign currency received/paid. Gain or loss results from changes in exchange rates between the functional currency and the foreign currency in which the transaction is denominated. Foreign transaction gains or losses are typically included in the income statement for the period in which the exchange rate changes. eg. merchandise is bought by a company in Country X for 100,000 euros. Assume the exchange rate is .7 euros = $1. The journal entry is to debit purchases and credit accounts payable for $142,857 (100,000/.7). (remember if the exchange rate is .7 dollars =1 euro, then you multiply 100000 x .7). When the merchandise is paid for, the exchange rate is .8 euros = $1. The cash payment is therefore $125,000. The journal entry is to debit accounts payable for $142,857 and credit cash for $125,000 and foreign exchange gain for $17,857. check also example p. F2-52

reporting currency

The currency in which an entity prepares its financial statements, normally the U.S. dollar