Deck 8: Translation of Financial Statements Into a Presentation Currency

Question 1

Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance sheet of Sing Sing as at 30 June 20X1 was as follows. Balance Sheet as at 30 June 20X1
$\begin{array}{c}\begin{array}{lll}\\ \text {Machinery- carrying value}\\ \text {Investment property}\\ \text { Receivables }\\ \text {Cash}\\\\\\ \end{array}\begin{array}{r}\underline{S \$} \\ 300000 \\400000 \\500000 \\600000 \\\underline{\quad\quad}\\ \underline{1800000} \\ \end{array}\begin{array}{l}\\ \text { Share capital}\\ \text { General Reserve}\\ \text { Retained earnings}\\ \text { Accounts payable}\\ \text { Income tax payable}\\\\\end{array}\begin{array}{r}\underline{S \$} \\400000 \\200000 \\1000000 \\170000 \\\underline{30000} \\\underline{1800000} \end{array}\end{array}$
-Relevant exchange rates are as follows.
$\begin{array}{llll}&\underline{ \text {A\$ }} &&\underline{ \text { S\$ }} \\\text { 1. July 20X0 } & 1.00 & & 1.15 \\\text { 30 June 20X1 } & 1.00 & = & 1.25 \\\text { Average 20X0-X1 } & 1.00 & = & 1.22\end{array}$
If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian dollars, the total assets of S$1 800,000 would translate into Australian dollars as:

A) $1 565 217.
B) $1 488 696.
C) $1 440 000.
D) $1 475 410.

Answer 1

$1 488 696.

Question 2

The exchange rate at a point of time for immediate delivery of the currency in an exchange is known as the:

A) spot rate.
B) point rate.
C) immediate rate.
D) temporal rate.

Answer 2

A

Question 3

By applying the definition provided in AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates, which of the following items will be regarded as a monetary item?

A) Motor vehicles
B) Inventory
C) Machinery
D) Cash

Answer 3

D

Question 4

Which of the following statements is incorrect?

A) The relevant accounting standard applied in translating financial statements into another currency is AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates.
B) The financial statements of an entity may be recorded in a foreign currency and translated into Australian dollars for the purpose of combining those statements with the financial statements of a related Australian company.
C) Not many companies in Australia have operations in both Australia and overseas locations.
D) The financial statements of an Australian company may be prepared in Australian dollars and translated into a foreign currency for presentation purposes.

Question 5

Where profits generated by the foreign operation are retained in the foreign entity and used for its expansion:

A) the foreign operation's currency is likely to be the presentation currency.
B) the foreign operation's currency is likely to be the functional currency.
C) the reporting entity's currency is likely to be the functional currency.
D) the reporting entity's currency is likely to be the presentation currency.

Question 6

According to the temporal method, monetary assets are translated at the:

A) average exchange rate for the reporting period.
B) current rate existing at the end of the reporting period.
C) exchange rate at the date the monetary assets were first recognised.
D) exchange rate existing at the start of the reporting period.

Question 7

Which of the following is an additional question to be asked in determining whether a foreign entity's functional currency is the same as that of the reporting entity?

A) Are the transactions with the reporting entity a high or low proportion of the foreign operation's activities?
B) Are the foreign operation's activities carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy?
C) Do the cash flows from the foreign operation's activities directly affect the reporting entity's cash flows?
D) All of the above.

Question 8

Assets and liabilities to be received or paid in a fixed or determinable number of units of money are referred to as:

A) monetary items.
B) fixed items.
C) non-monetary items.
D) fixed units.

Question 9

When translating into the functional currency, monetary liabilities are translated using the:

A) exchange rate current at the date the item was first recorded.
B) exchange rate prevailing at the end of the last reporting period.
C) average exchange rate for the reporting period.
D) current exchange rate at the end of the reporting period.

Question 10

Indicators pointing towards the reporting entity's currency as the functional currency include that which of the following?

A) There are active local markets, although there may be significant amounts of exports.
B) Sales are mostly in the country of the reporting entity.
C) Prices are not primarily responsive in the short term to exchange rate changes.
D) Production costs and operating expenses are determined primarily by local conditions.

Question 11

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

A) translated into the functional currency using the rate current at the latest end of reporting period.
B) translated into the functional currency using the average rate since acquisition date.
C) translated into the functional currency using the rates at the end of each year since acquisition date.
D) balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.

Question 12

The presentation currency is:

A) the currency of the primary economic environment in which the foreign entity operates.
B) a currency other than the entity's functional currency .
C) the currency of the country in which the foreign operation is based.
D) the currency in which the financial statements are presented by the reporting entity.

Question 13

According to AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates, the key economic factor to consider in determining an entity's functional currency is:

A) which economic environment has the higher exchange rate.
B) in which economic environment does the company incur the highest proportion of its production costs.
C) which economic environment an entity primarily generates and spends cash.
D) none of the above.

Question 14

When translating into the functional currency, foreign currency denominated non-monetary assets measured at historical cost must be translated using the:

A) spot rate at end of reporting period.
B) average rate for the reporting period.
C) exchange rate when the historical cost was determined.
D) exchange rate when the historical cost was revalued to fair value.

Question 15

The currency of the country in which the foreign operation is based is referred to as the:

A) local currency.
B) presentation currency.
C) operational currency.
D) functional currency.

Question 16

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised:

A) in profit or loss in the period in which they arise.
B) directly in the retained earnings account.
C) as a deferred asset or liability and amortised over a period of 10 years.
D) as a separate component of equity.

Question 17

Which exchange rate should be used when translating revenue and expense items in the statement of profit or loss and other comprehensive income into the functional currency?

A) Current as at the end of the financial year.
B) Calculated as the average between the rates at the start and end of the year.
C) Current at the dates the applicable transaction occurred.
D) None of the above.

Question 18

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:

A) translate all liabilities using the current rate existing at the end of the reporting period.
B) first classify the liabilities into current or non-current.
C) first classify the liabilities as monetary or non-monetary.
D) translate all liabilities using the rate applicable when the original transaction was recorded.

Question 19

The method used to translate financial statements prepared in the functional currency into the presentation currency is known as the:

A) temporal method.
B) functional method.
C) current rate method.
D) presentation method.

Question 20

If foreign currency denominated non-monetary assets are measured using the fair value method, they must be translated into the functional currency using the:

A) exchange rate at the date when the assets were revalued.
B) exchange rate current at the end of the reporting period.
C) average exchange rate for the financial year.
D) exchange rate at the original purchase date of the asset.

Question 21

Gairdner Limited has the following items in its statement of profit or loss and other comprehensive income for the year ended 30 June 20X4: Revenue FC120 000,
Cost of goods sold FC50 000,
Other expenses FC16 000,
Income tax expense FC20 000.
All items were earned and incurred evenly across the year. The following exchange rates applied:
End of reporting period FC1 = $1.45
Average rate for year FC1 = $1.40
The net profit after tax translated into the presentation currency is:

A) $47 600.
B) $24 286.
C) $23 448.
D) $49 300.

Question 22

Translating from the functional currency to the presentation currency involves which of the following procedures?

A) Recognise exchange differences in other comprehensive income.
B) Translate the income and expenses at the exchange rates at the dates of the transactions.
C) Translate the assets and liabilities at the closing rate at the date of the statement of financial position.
D) All of the above.

Question 23

When translating into the presentation currency, all assets and liabilities are translated using the:

A) average exchange rate for the financial period.
B) exchange rate applicable when the original transaction was recorded.
C) exchange rate current at the date of the statement of financial position.
D) exchange rate as at the start of the reporting period.

Question 24

Which of the following must be disclosed when the presentation currency of the parent entity is different from the functional currency?

A) The reason for using a different presentation currency
B) The fact they are different
C) The functional currency
D) All of the above

Question 25

Which of the following statements is incorrect?

A) Movements in the foreign currency translation reserve must be disclosed.
B) Exchanges differences included in profit or loss must be disclosed.
C) There is no need to disclose if the presentation currency is different from the functional currency.
D) AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates requires disclosures about the translation of financial statements into other currencies.

Question 26

Under AASB 121/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.

A) I, II, III and IV
B) II and III only
C) I, III and IV only
D) I and IV only

Question 27

Dividends declared are translated into the presentation currency at the:

A) average exchange rate for the reporting period.
B) rates current when the dividends are declared.
C) rates current when the dividends are paid to the shareholders.
D) rates current when the shareholders approve the dividend at the company's annual general meeting.

Question 28

If a reporting entity establishes a foreign operation, the equity used to form the foreign operation is the:

A) pre-acquisition equity.
B) foreign equity.
C) reporting equity.
D) post-acquisition equity.

Question 29

When translating from the functional currency into the presentation currency, exchange differences arise because of which of the following?

A) Opening net assets are translated at a closing rate different from the previous closing rate
B) Income and expense items are translated at rates different from the closing rate used for all assets and liabilities
C) Both a and b
D) None of the above

Question 30

Exchange differences arising when translating from the functional currency into the presentation currency are recognised in other comprehensive income and:

A) recorded as a deferred asset and amortised over the expected useful life.
B) recognised in profit or loss.
C) accumulated in equity using a 'foreign currency translation reserve'.
D) accumulated in equity using retained earnings.