Foreign Currency and Hyperinflationary Economies Flashcards

A parent acquires equipment through its foreign subsidiary at a cost of €500,000 when the rate is $1.20/€. At year-end the rate is $1.25/€. At what rate is the equipment (measured at historical cost) translated in the consolidated statements?

Answer: $1.20/€ — the historical rate at the acquisition date

Equipment carried at historical cost is a non-monetary item and is translated at the historical rate — the rate at the date the cost was incurred.

Under IAS 21, when a parent disposes of a foreign operation, the cumulative exchange differences held in the translation reserve relating to that operation are:

Answer: Reclassified from equity to profit or loss (recycled) as part of the gain or loss on disposal

On disposal of a foreign operation, the cumulative translation differences are recycled from OCI to profit or loss as part of the gain or loss recognized on disposal.

Which of the following is NOT a primary indicator used to determine an entity's functional currency under IAS 21?

Answer: The currency in which the entity files its tax returns

Tax filing currency is not a primary indicator; IAS 21 paragraph 9 focuses on the currencies that drive revenues and costs in the entity's economic environment.

Under IAS 21, an entity's presentation currency differs from its functional currency. Which statement best describes the required translation approach?

Answer: Assets and liabilities are translated at the closing rate; income and expenses at transaction-date rates; and equity at historical rates

IAS 21 permits a presentation currency different from the functional currency and requires assets/liabilities at closing rate, income/expenses at transaction-date rates, and equity at historical rates.

Under IAS 21, goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as:

Answer: Assets and liabilities of the foreign operation, translated at the closing rate at each reporting date

IAS 21 requires goodwill and fair value adjustments to be treated as assets and liabilities of the foreign operation and therefore retranslated at the closing rate at each reporting date.

Company P (functional currency GBP) has a long-term intragroup loan to subsidiary S (functional currency EUR) that is not expected to be settled in the foreseeable future. How are exchange differences on this loan treated in P's individual financial statements?

Answer: Recognized in OCI in P's individual financial statements

In P's individual statements the balance is a monetary item subject to normal IAS 21 treatment — exchange differences go to profit or loss; OCI treatment only applies at the consolidated level when the loan forms part of the net investment.

In consolidated financial statements, exchange differences on a long-term intragroup monetary item that in substance forms part of the parent's net investment in a foreign operation are:

Answer: Recognized in other comprehensive income and held in the translation reserve

IAS 21 paragraph 32 requires exchange differences on monetary items that form part of the net investment in a foreign operation to be recognized in OCI in the consolidated statements.