Certificate in International Financial Reporting Foreign Currency and Hyperinflationary Economies 2 — Questions and Answers
Question 1: 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?
- $1.25/€ — the closing rate at the reporting date
- $1.225/€ — the average of the opening and closing rates
- $1.20/€ — the historical rate at the acquisition date (Correct answer)
- Whichever rate produces the most faithful representation
Correct 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.
Question 2: 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:
- Written off directly against retained earnings on disposal
- Reclassified from equity to profit or loss (recycled) as part of the gain or loss on disposal (Correct answer)
- Retained permanently in the translation reserve with no further action
- Reversed back to the original assets and liabilities disposed of
Correct 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.
Question 3: Which of the following is NOT a primary indicator used to determine an entity's functional currency under IAS 21?
- The currency that mainly influences sales prices for goods and services
- The currency of the country whose competitive forces mainly determine selling prices
- The currency in which the entity files its tax returns (Correct answer)
- The currency that mainly influences labor, material, and other operating costs
Correct 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.
Question 4: Under IAS 21, an entity's presentation currency differs from its functional currency. Which statement best describes the required translation approach?
- This situation is prohibited; the presentation currency must match the functional currency
- The entity must seek approval from its tax authority before changing presentation currency
- Assets and liabilities are translated at the closing rate; income and expenses at transaction-date rates; and equity at historical rates (Correct answer)
- All items are translated at the average rate for the reporting period for simplicity
Correct 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.
Question 5: Under IAS 21, goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as:
- Assets and liabilities of the acquirer, translated at the rate on the acquisition date only
- Assets and liabilities of the foreign operation, translated at the closing rate at each reporting date (Correct answer)
- Retained in the acquirer's functional currency with no further translation
- Amortized using the average exchange rate for the year of acquisition
Correct 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.
Question 6: 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?
- Recognized in profit or loss in P's individual financial statements
- Recognized in OCI in P's individual financial statements (Correct answer)
- Eliminated in P's individual statements as an intragroup balance
- Deferred until the loan is eventually repaid
Correct 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.
Question 7: 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:
- Recognized in profit or loss in the consolidated income statement
- Recognized in other comprehensive income and held in the translation reserve (Correct answer)
- Offset against goodwill arising on acquisition
- Deferred until settlement and then released to profit or loss
Correct 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.
Certificate in International Financial Reporting Foreign Currency and Hyperinflationary Economies 2
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?