Foreign Policy

Question 1

what are the 2 situations where a foreign currency problem arises

Answer 1

1. a transaction is executed in a currency other than the one in which the books are maintained and must remeasure the transaction
2. the company maintains books in one currency, but needs to issue financial statements using a different one, and must translate all the accounts

Question 2

what is the difference between a transactional foreign currency situation vs a translation foreign currency situation

Answer 2

transactions relate to financial actions taken by the company in different currencies.
translations relate to converting financial statements from one currency to another

Question 3

where on the financial statements do foreign currency transaction gains/losses go

Answer 3

income statement under non-operating income

Question 4

where on the financial statements do foreign currency translation gains/losses go

Answer 4

on the balance sheet under other comprehensive income

Question 5

what exchange rate is used for balance sheet foreign currency remeasurement: nonmonetary assets/liabilities and contributed capital

Answer 5

historical exchange rate on the date of the transaction

Question 6

what exchange rate is used for balance sheet foreign currency remeasurement: monetary assets / liabilities

Answer 6

spot rate (current rate) at balance sheet date

Question 7

foreign currency financial statement remeasurement: what is the next step after the balance sheet has been translated

Answer 7

plug is to retained earnings,
then carry that number to the statement of retained earnings ending balance.
Subtract the beginning balance which will give you net income.
Then move on to remeasure the income statement

Question 8

what exchange rate is used for income statement foreign currency remeasurement: items that DO NOT represent allocations of historical balances (depreciation amortization, COGS)

Answer 8

weighted-average exchange rate over the period

Question 9

what are the 2 types of foreign currency TRANSACTIONS

Answer 9

1. operating transactions (buying / selling from a foreign company)
2. forward exchange contracts (agreement to exchange 2 different currencies at a future date, at a specific rate)

Question 10

what are 3 reasons a company would enter into a foreign exchange contract agreement to exchange 2 different currencies at a future date, at a specific rate)

Answer 10

1. to speculate in the foreign currency in an attempt to profit from changes in valuation
2. To enter in to a fair value hedge and avoid losses on changes in existing foreign currency related asset, liability or commitment
3. To enter into a cash flow hedge and avoid losses on changes in a planned future foreign currency related transaction

Question 11

IFRS - What are the 3 types of foreign currency definitions for transactions and translations

Answer 11

1. functional currency - the currency of the primary economic environment in which the company operates
2. foreign currency (local) - a currency other than the functional currency
3. presentational currency (reporting) - the currency in which financial statements are presented ($US)

Question 12

IFRS - what are the 3 steps in the process for TRANSLATING financial statements

Answer 12

1. Determine the functional currency
2. Translate items into the functional currency
3. Translate items into the presentation currency

Question 13

foreign currency translation

Answer 13

converting F/S of foreign entity to F/S in domestic currency

Question 14

accounting for foreign currency transactions

Answer 14

1. record receivable/payable at spot rate

2. gain/loss = change in spot rate * receivable/payable

Question 15

functional currency is local currency

Answer 15

translate from local to USD

Question 16

functional currency is USD

Answer 16

remeasure local to USD

Question 17

functional is not local and is not USD

Answer 17

1. remeasure local to functional

2. translate functional to USD

Question 18

translation adjustments reported in

Answer 18

OCI

Question 19

remeasurement gains/losses reported

Answer 19

net income

Question 20

remeasurement of balance sheet items

Answer 20

1. monetary: use current rate

2. nonmonetary: use historical rate

Question 21

remeasurement of income statement items

Answer 21

1. revenues & expenses: weighted average

2. depreciation, cogs, and amortization: historical rate

Question 22

translation of balance sheet items

Answer 22

1. assets & liabilities: current rate at year end
2. equity: historical rate
3. retained earnings: roll forward

Question 23

translation of income statement items

Answer 23

1. income & expense: weighted average

2. net income: to retained earnings

Question 24

process of foreign currency translation

Answer 24

foreign is DiFFeRent

1. Determine Functional currency
2. translate to Functional currency
3. Remeasure to reporting currency