Exam 28: Translation of the Financial Statements of Foreign Entities

Yandos Limited has made a loan of A$50 000 to a foreign subsidiary in Japan, Yamuchi Limited. The loan was made when the exchange rate was A$4 = Y1. By reporting date, the exchange rate had changed to A$5 = Y1. The Australian parent will need to recognise the following as part of the entry to revalue the loan:

Under IAS 21 The Effects of Changes in Foreign Exchange Rates, an entity must disclose which of the following items in particular? I. The amount of exchange differences included in profit or loss of the period. II. The amount of the exchange difference included directly in share capital during the period. III. Whether a change in the functional currency has occurred. IV. The reason for using a presentation currency that is different from the functional currency.

Post acquisition date retained earnings that are denominated in a foreign currency are:

Indicators pointing towards the local overseas currency as the functional currency include, that the: I. Parent's cash flows are directly affected on a current basis. II. Cash flows are primarily in the local currency and do not affect the parent's cash flows. III. Sales prices are primarily responsive to exchange rate changes in the short-term. IV. Production costs are determined primarily by local conditions.

The following information relates to questions 23 to 25 On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000. At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000. All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%. Exchange rates are as follows: 1 January 20X3 A$1.00 = NZ$1.20 31 December 20X3 A$1.00 = NZ$1.40 Average for the year A$1.00 = NZ$1.30 -The goodwill arising on Claudia's acquisition of Saskia is:

Mortimer Limited has the following items in its statement of profit or loss and other comprehensive income: Revenue FC60 000, Cost of goods sold FC25 000, Interest expense FC8 000, Income tax expense FC10 000. All items arose evenly across the year. The following exchange rates applied: End of reporting period FC1 = $0.80 Average rate for year FC1 = $0.75 The net profit after tax translated into the presentation currency is:

When translating into the presentation currency the translation difference is recognised:

Differences arise in relation to the treatment of which of the following when translating from the local to functional currency as opposed to the functional to presentation currency?