International Accounting Quiz 2
When the parent company of a foreign subsidiary believes that all of its investment in the subsidiary is exposed to foreign exchange risk, what method of translation should be used in consolidating the financial statements?
Current rate method
Which of the following methods for translating foreign currency financial statements is required under IAS 21?
Current rate method or temporal method, depending on the functional currency of the subsidiary.
Which of the following is a limitation of using the temporal method for translating foreign currency financial statements?
Financial ratios after translation will be distorted.
According to FASB ASC 830, Foreign Currency Matters, which of the following conditions would indicate that a foreign subsidiary's functional currency is the parent company's currency?
High volume of intercompany transactions
Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's additional paid-in capital into parent company currency?
Historical rate
Under both the temporal method and the current rate method, what exchange rate should be used to translate a foreign subsidiary's dividends into parent company currency?
Historical rate
Under the temporal method of consolidating foreign currency financial statements, what exchange rate should be used for translating the depreciation expense recorded by a subsidiary?
Historical rate
What exchange rate should be used to translate the common stock of Essco Ltd, a foreign subsidiary of Peako Corp., when consolidating the financial statements using the current rate method?
Historical rate
Under the current rate method of translating foreign currency financial statements, what is the amount of the balance sheet exposure?
It is equal to the foreign operation's net asset position.
When would the balance sheet exposure arising from the current rate method become realized?
It is realized when the foreign operation is sold at book value and the proceeds are converted into parent company currency.
Using the temporal method of translating foreign currency financial statements, what basis should be employed when using the "lower of cost or market" rule for inventory valuation?
Lower of parent currency cost or parent currency market at appropriate exchange rate
Which of the following is true of monetary assets?
Monetary assets include current assets like marketable securities.
What is one problem in translating retained earnings using either the temporal or current rate method?
Net income is calculated differently, depending upon which method is used.
What is the paradox of hedging balance sheet exposure
Real costs can be incurred to hedge an unrealized translation adjustment.
) Under U.S. GAAP, what method of translating foreign currency financial statements must be used for subsidiaries in highly inflationary economies?
Temporal method
Which of the following methods for translating foreign currency financial statements attempts to produce consolidated financial statements as if a foreign subsidiary had actually used the parent company's currency for all its transactions?
Temporal method
Which of the following methods for translating foreign currency financial statements is required to be used under IAS 21?
Temporal method
Which method of translating foreign currency financial statements must be used according to FASB ASC 830, Foreign Currency Matters?
Temporal method for subsidiaries that are closely controlled by the parent and current rate method for subsidiaries which are not
A Danish subsidiary of a U.S. corporation recorded a building it purchased in 2020 for 100,000,000 krone, when the exchange rate was $0.132/krone. The current exchange rate is $0.163/krone. Under the temporal method, how should the translated amount of the restated asset be interpreted?
The U.S. parent would have had to pay $13,200,000 to acquire the building in 2020.
In their research published in 1988 related to translating foreign currency financial statements, Doupnik and Evans found that U.S. multinationals were biased in favor of using a foreign currency as the functional currency. What reason did the researchers give for this management decision?
This allows the use of the current method, which defers recognizing translation gains or losses in income.
What is the primary difference between transaction exposure and accounting exposure?
Transaction exposure results in changes in cash flow, whereas accounting exposure does not necessarily result in changes in cash flow.
What is another term for "balance sheet exposure?"
Translation exposure
Homeko, Inc. is located in the U.S., but it has subsidiaries in Germany. When the euro appreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Homeko's financial statements?
When there is net asset exposure, the translation adjustment will be positive.
Excellent Inc. is located in the U.S., but it has subsidiaries in Japan. When the yen depreciates relative to the U.S. dollar, what is the direction of the translation adjustment to consolidate Excellent's financial statements?
When there is net liability exposure, the translation adjustment will be positive.
) International accounting standards define functional currency as:
the currency of the primary economic environment in which the subsidiary operates.
Companies must choose between which exchange rates for consolidating foreign subsidiaries?
Current rate and historical rate
Which of the following items in the balance sheet is subject to accounting exposure?
All accounts translated at current exchange rates
Under the current rate method of translating foreign currency financial statements, what exchange rate should be used for cost of goods sold?
Average rate during the year
What is meant by the "translation" of foreign currency financial statements?
Converting financial statements of a foreign currency into a domestic currency
) Essco Ltd, a foreign subsidiary of Peako Corp., has written down its inventory to current market value under a "lower of cost or market" rule. When consolidating Essco's balance sheet into Peako's balance sheet using the current rate method, what exchange rate should be used for the inventory under the temporal method?
Current rate
Under FASB ASC 830, Foreign Currency Matters, when the temporal method is used, how are translation adjustments treated in the consolidated financial statements?
) As gains or losses on the current period consolidated income statement
What is the "disappearing plant" problem that is addressed by FASB ASC 830, Foreign Currency Matters?
) High inflation can result in extreme decreases in the reported amounts for foreign fixed assets
How is the international standard for translating foreign currency financial statements (IAS 21) different from U.S. GAAP with respect to subsidiaries in hyperinflationary economies?
) IAS 21 requires that the subsidiary's financial statements be restated to account for the inflation before using the current exchange rate for all balance sheet accounts.
) Under FASB ASC 830, Foreign Currency Matters, what is the definition of "functional currency?"
) The primary currency of the foreign entity's operating environment
