Exam 10: Translation and Consolidation of Foreign Currency Financial Statements

What of the following factors indicate that the functional currency of a foreign operation is not that of the reporting entity?

An exchange rate stated in the indirect form as AUD 1.25 = USD 1.00 represents a reciprocal of:

Discuss the objectives of translation of financial statements of foreign operations.

Where the choice of an entity's functional currency is not clear cut the choice should be based on currency of largest proportion of export sales.

When the functional currency of a foreign operation is a foreign currency,translation of financial statements is done using:

The primary economic environment in which an entity operates is determined by:

Under current accounting standards a company may choose between the current rate and temporal methods of translating foreign currency financial statements.

The transactions of a foreign company must be recorded in:

A foreign exchange gain arising from translating financial statements should always be recorded as revenue

The following data relate to Questions 18-22: During the year ended June 30 20X7, Johnson Ltd became deeply involved in trade with Malaysia. On July 1 20X6, the company acquired 50% of the share capital of a Malaysian palm oil producer, Plantations Berhad, for $7,000,000. For the year ended June 30 20X7, the following balance sheet and income statement were prepared by Plantations Berhad (amounts in thousands): Income Statement for the Year ended June 30 20X7 Balance Sheet as at June 30 20X7 Statement of the Movement in Retained Earnings in the Year ended June 30 20X7 The functional currency of Plantations Berhad was Malaysian Ringgit. The following translation statement was prepared for the company (amounts in thousands): Additional information: a) A deferred tax liability of 30% of the foreign currency translation reserve is to be recognised. b) On July 1 20X6, as a partial hedge against its investment in Plantations Berhad, Johnson Ltd took out a three (3) year loan of R 8,000,000 from the Bank Negara at 12% interest, with interest payable quarterly commencing September 30 20X6. c) On May 15 20X7 Johnson Ltd placed an order for R 2,000,000 in merchandise for resale from Malaysian Industries Berhad, payable in USD. The goods were shipped FOB on May 31 with settlement due on July 31 20X7. At relevant dates the exchange rates were: -In the separate income statement of Johnson Ltd for the year ended June 30 20X7,the translation gain or loss arising on the loan from the Bank Negara was (rounded to the nearest thousand dollars):

The translation gain or loss on a foreign operation using the current rate method represents the effect of exchange rate movements on net assets.

Accounting for a foreign subsidiary must use the 'translate then consolidate' approach

Alternative exchange rates which can be used to translate foreign currency amounts are:

Foreign currency transactions include:

Cash flows from foreign operations denominated in a foreign currency will normally be translated using:

The following data relate to Questions 18-22: During the year ended June 30 20X7, Johnson Ltd became deeply involved in trade with Malaysia. On July 1 20X6, the company acquired 50% of the share capital of a Malaysian palm oil producer, Plantations Berhad, for $7,000,000. For the year ended June 30 20X7, the following balance sheet and income statement were prepared by Plantations Berhad (amounts in thousands): Income Statement for the Year ended June 30 20X7 Balance Sheet as at June 30 20X7 Statement of the Movement in Retained Earnings in the Year ended June 30 20X7 The functional currency of Plantations Berhad was Malaysian Ringgit. The following translation statement was prepared for the company (amounts in thousands): Additional information: a) A deferred tax liability of 30% of the foreign currency translation reserve is to be recognised. b) On July 1 20X6, as a partial hedge against its investment in Plantations Berhad, Johnson Ltd took out a three (3) year loan of R 8,000,000 from the Bank Negara at 12% interest, with interest payable quarterly commencing September 30 20X6. c) On May 15 20X7 Johnson Ltd placed an order for R 2,000,000 in merchandise for resale from Malaysian Industries Berhad, payable in USD. The goods were shipped FOB on May 31 with settlement due on July 31 20X7. At relevant dates the exchange rates were: -In the consolidated balance sheet at June 30 20X7 of the group controlled by Johnson Ltd,the foreign currency translation reserve attributable to the members the parent entity would be (rounded to the nearest thousand dollars):

Discuss whether the use of the current rate method provides adequate disclosure of the exposure of a foreign operation to exchange rate movements.

A 'natural hedge' occurs when an Australian company's foreign operation is financed using:

The following data relate to Questions 18-22: During the year ended June 30 20X7, Johnson Ltd became deeply involved in trade with Malaysia. On July 1 20X6, the company acquired 50% of the share capital of a Malaysian palm oil producer, Plantations Berhad, for $7,000,000. For the year ended June 30 20X7, the following balance sheet and income statement were prepared by Plantations Berhad (amounts in thousands): Income Statement for the Year ended June 30 20X7 Balance Sheet as at June 30 20X7 Statement of the Movement in Retained Earnings in the Year ended June 30 20X7 The functional currency of Plantations Berhad was Malaysian Ringgit. The following translation statement was prepared for the company (amounts in thousands): Additional information: a) A deferred tax liability of 30% of the foreign currency translation reserve is to be recognised. b) On July 1 20X6, as a partial hedge against its investment in Plantations Berhad, Johnson Ltd took out a three (3) year loan of R 8,000,000 from the Bank Negara at 12% interest, with interest payable quarterly commencing September 30 20X6. c) On May 15 20X7 Johnson Ltd placed an order for R 2,000,000 in merchandise for resale from Malaysian Industries Berhad, payable in USD. The goods were shipped FOB on May 31 with settlement due on July 31 20X7. At relevant dates the exchange rates were: -The transaction involving the purchase of the merchandise inventory from Malaysian Industries Berhad is:

Translation of financial statements into the presentation currency requires: