Deck 24: Foreign Currency Translation

Question 1

Maypole Pty Ltd is an Australian company which has a functional currency of Australian dollars.Appleflower Pty Ltd is a US company which is a wholly owned subsidiary of Maypole.Its functional currency is US dollars.To comply with AASB 121,Maypole must translate the financial statements of Appleflower into Australian dollars to report in the consolidated groups financial statements.
Appleflower has land which it acquired on 17 October 20X0 for US$ 500 000.The relevant exchange rates are as follows:
$\begin{array}{llr} \text { Spot rate at date of acquisition } & \text {AUS \( 1= \) US \( \$ 0.80 \)}\\ \text { Spot rate at 30 june \( 20 \times 1 \) } &\text { AUS \( 1= \) US \( \$ 0.85 \)}\\\text { Average rate for the } 20 \times 1 \text { financialyear }&\text { AUS \( 1= \) US\$ 0.82}\end{array}$


The amount which should be recorded in the Maypole consolidated group for the land for the 20X1 financial year (assuming no fair value adjustments have occurred).is:

A) AU$ 425 000
B) AU$ 410 000
C) AU$ 400 000
D) AU$ 500 000

Answer 1

AU$ 425 000

Question 2

From paragraph 9,indicators of an entity's functional currency include which of the following:

A) that mainly influences sales prices for goods and services
B) of the country whose competitive forces and regulations mainly determine the sales price of its goods and services
C) the currency that mainly influences labour, material and other costs of providing goods or services
D) all of the above

Answer 2

D

Question 3

Once an entity has designated the hedging relationship and it qualifies for hedge accounting,it is classified as which one of three types of relationships:

A) a fair value excess capital
B) a cash flow analysis
C) the hedge of a net investment in a foreign operation as defined in AASB 121 (para. 86)
D) a fair value statement

Answer 3

C

Question 4

Exchange rates between the Australian dollar and the US dollar are determined by:

A) jointly by the Reserve Bank of Australia and the US Federal Reserve Board
B) the Reserve Bank of Australia
C) the Australian Department of Treasury
D) the supply of and demand for the two currencies

Question 5

The requirements for AASB 121 (para 39)include which of the following:

A) assets and liabilities for each statement of financial position presented (i.e. including comparatives) shall be translated at the closing rate at the date of that statement of financial position
B) income and expenses for each statement presenting profit or loss and other comprehensive income (i.e. including comparatives) shall be translated at exchange rates at the dates of the transactions
C) all resulting exchange differences shall be recognised in other comprehensive income
D) all of the above

Question 6

The 'functional currency' of a business is:

A) the currency of the country in which the business is incorporated
B) the currency of the primary economic environment in which the company operates
C) the currency in which the business presents its financial reports
D) the currency of the country in which the majority of the shareholders of the business are located

Question 7

When translating the assets and liabilities from functional currency to presentation currency,AASB 121 requires that:

A) the exchange rates at the dates of transaction are used
B) the exchange rate as at the end of the reporting period is used
C) an average exchange rate for the year of reporting be used
D) either a or c can be used

Question 8

The 'forward' rate of exchange for foreign currencies is:

A) the rate of exchange between the Australian dollar and the US dollar
B) the rate applicable to funds to be forwarded to an overseas country
C) the rate at which currencies can be exchanged at some future date
D) the rate at which currencies can be exchanged immediately

Question 9

A transaction that is denominated on or requires settlement in a foreign currency is:

A) a forward agreement
B) a foreign currency transaction
C) a spot rate
D) a hedging instrument

Question 10

At the end of subsequent reporting periods,paragraph 23 requires that non-monetary items:

A) non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction
B) non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined
C) both A and B
D) none of the above

Question 11

Which of the following methods have been suggested for translating foreign currency financial statements:

A) historical method
B) closing-return method
C) current-return method
D) all of the above

Question 12

Respectively,a company's domestic currency,functional currency and presentation currency are:
I.the currency in which the financial statements must be presented
ii) the currency in whichan entity is required to measureits financial performance and position
iii) the currency of the country of incorporation
iv) the currency of the country in which the majority of shareholders are located

A) i, ii, iv
B) iii, iv, i
C) iii, ii, i
D) iv, iii, ii

Question 13

The main objective of translating the financial statements of foreign operations into Australian dollars is to:

A) compare the performance of the foreign subsidiary's managers with their Australian counterparts
B) meet the requirements of tax legislation
C) incorporate the results of the foreign operations into the consolidated financial reports
D) evaluate the performance of the foreign subsidiary's managers

Question 14

The 'spot' rate of exchange for foreign currencies is:

A) the rate at which currencies can be exchanged in a particular place (e.g., in Sydney or in New York)
B) the rate of exchange between the Australian dollar and the US dollar
C) the rate at which currencies can be exchanged on the New York foreign exchange market
D) the rate at which currencies can be exchanged immediately

Question 15

AASB 121 requires the translation of financial statements in which of the following circumstances?
I.if the domestic currency of the foreign operation is not the same as the functional
currency of its parent
ii) if the functional currency of the foreign operation is not the same as the functional currency of its parent
iii) if the functional durrency of the econornicentity is not its presentationcurrency
iv) if the presentationarrency of the econornicentity is not its functional currency

A) i and ii
B) ii and iii
C) iii and iv
D) i and iii

Question 16

A way in which a foreign currency transaction can be hedged is:

A) Buy (or sell) foreign currency at the date of the initial transaction
B) Enter into a forward rate agreement to fix the cost of the currency at a fixed date in the future
C) Enter into a transaction which neutralises the risk (e.g., have accounts receivable and accounts payable in the same currency with the same payment dates)
D) All of the above

Question 17

Which of the following represents three criteria of which all must be met by a hedging relationship for it to qualify for hedge accounting?

A) the hedging relationship consists only of eligible hedging instruments and eligible hedged items
B) at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge
C) the hedging relationship meets hedge effectiveness requirements
D) all of the above

Question 18

An effective foreign currency hedging transaction will:

A) largely eliminate the risk of loss but allow a gain to be made on a foreign exchange transaction
B) require the services of a banker or similar financial intermediary
C) largely eliminate both the risk of loss and the possibility of gain on a foreign exchange transaction
D) involve both A and C above

Question 19

AASB 121 requires that non-monetary items are measured,subsequent to their initial recognition,at:

A) the exchange rate at the date of transaction
B) the exchange rate at the date of that the fair value was determined
C) an average exchange rate at the end of the reporting period
D) both A and B can apply

Question 20

In relation to cash flow hedges,AASB 7 requires that an entity must disclose separately which of the following?

A) the amount reclassified from the statement of owners' equity
B) hedge effectiveness statement
C) hedging gains or losses of the reporting that were recognised in other comprehensive income
D) hedge accountability statement

Question 21

AASB 121 requires an entity to measure its financial performance and financial position in its functional currency.What are the indicators of a functional currency? Is the functional currency the same as the presentation currency? Explain your answers.

Question 22

Explain,using simple numerical examples,the hedging of currency risk.

Question 23

There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.

Question 24

Explain,using simple numerical example(s),how hedging a foreign currency transaction can remove uncertainty about the outcome of the transaction.