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

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:

Accepted Answer

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

Answer

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?

Accepted Answer

The currency in which the entity files its tax returns

Answer

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?

Accepted Answer

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

Answer

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:

Accepted Answer

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

Answer

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.

Certificate in International Financial Reporting Practice Test

Certificate in International Financial Reporting Practice Test

Certificate in International Financial Reporting Foreign Currency and Hyperinflationary Economies 2