Certificate in International Financial Reporting Foreign Currency and Hyperinflationary Economies 2

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?

Accepted Answer

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

Answer

$1.25/€ — the closing rate at the reporting date

Answer

$1.225/€ — the average of the opening and closing rates

Answer

Whichever rate produces the most faithful representation

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:

Accepted Answer

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

Answer

Written off directly against retained earnings on disposal

Answer

Retained permanently in the translation reserve with no further action

Answer

Reversed back to the original assets and liabilities disposed of

Question 3

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

Accepted Answer

The currency in which the entity files its tax returns

Answer

The currency that mainly influences sales prices for goods and services

Answer

The currency of the country whose competitive forces mainly determine selling prices

Answer

The currency that mainly influences labor, material, and other operating costs

Question 4

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

Accepted Answer

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

Answer

This situation is prohibited; the presentation currency must match the functional currency

Answer

The entity must seek approval from its tax authority before changing presentation currency

Answer

All items are translated at the average rate for the reporting period for simplicity

Question 5

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

Accepted Answer

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

Answer

Assets and liabilities of the acquirer, translated at the rate on the acquisition date only

Answer

Retained in the acquirer's functional currency with no further translation

Answer

Amortized using the average exchange rate for the year of acquisition

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?

Accepted Answer

Recognized in OCI in P's individual financial statements

Answer

Recognized in profit or loss in P's individual financial statements

Answer

Eliminated in P's individual statements as an intragroup balance

Answer

Deferred until the loan is eventually repaid

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:

Accepted Answer

Recognized in other comprehensive income and held in the translation reserve

Answer

Recognized in profit or loss in the consolidated income statement

Answer

Offset against goodwill arising on acquisition

Answer

Deferred until settlement and then released to profit or loss