Exam 25: The Effects of Changes in Foreign Exchange Rates

Delfi Entity (DE), with the functional and presentation currency of the US dollar, established a Canadian subsidiary, Northern Entity (NE), an assembly plant located on the Canadian side of Niagara Falls. Other than paying its employees for labor in the Canadian dollars (local currency), all of NE's transactions are with the parent. NE is financed mainly by the parent. DE provides the subsidiary with any necessary parts and equipment. What is NE's functional currency?

List the primary indicators that priority is given to in determining an entity's functional currency,

Substantial controversy exists in practice over how translation gains and losses should be reflected in the financial statements.

On July 1, 20X7, Kim Entity (KE), a Korean importer, with the South Korean Won as its functional and presentation currency, buys inventory from a Brazilian exporter, Waldir Entity (WE), on credit at a price of 40,000 Brazilian real to be paid on August 15. The spot exchange rate is BRL1= KRW300 at the transaction date. -How will KE account for the purchase on July 1?

What is the correct order in the steps for translating foreign currency financial statements? 1) Translate all foreign currency items from the entity's functional currency into the presentation currency, if different. 2) Translate all foreign currency items into the entity's functional currency. 3) Report the effects of such translation in accordance with IAS 21. 4) Determine the entity's functional currency.

Plane & Lathe is a securities broker and investment bank located in Manchester. Plane & Lathe specializes in trading on the London Stock Exchange. Recently, due to economic changes, Plane & Lathe has started trading predominantly on the New York Stock Exchange. Their functional currency changed, as a result, from the British pound to the U.S. dollar. This change is considered a change in accounting policy.