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FAR 6_05

  1. What is the difference between a foreign currency transaction vs translation?
    • A transaction occurs when an item is bought or sold.
    • Translation occurs when the financial statements are converted from one currency to another.
  2. What is the difference between the reporting vs functional currency?
    • The reporting currency is the currency used by the parent company.
    • The functional currency is the currency that should be used by the subsidiary because it is the local currency.
  3. When is foreign currency remeasurement used?
    When the currency used by the subsidiary is not the local currency. The financial statements must be translated from the used currency to the functional currency (the local currency).
  4. What is foreign currency translation used?
    To convert the foreign subsidiary’s financial statements, which are in the local (functional) currency into the reporting currency.
  5. What are the steps in performing a foreign financial statement restatement?
    • Step 1: Ensure the financial statements are in conformance with either GAAP or IFRS (whichever is applicable)
    • Step 2: Translate the Balance Sheet using the following exchange rates
    • ++ Monetary Items = current or year-end rate
    • ++ Nonmonetary Items = historical rate
    • Determine what amount of Retained Earnings are necessary to make the statement balance (this will be used later)
    • Step 3: Translate the Income Statement using the following exchange rates
    • ++ Non-balance sheet-related items = weighted average rate
    • ++ Balance sheet-related items (COGS/Inventory, Depreciation Expense/PP&E, Amortization/Bonds & Intangibles) = historical cost
    • ++ Add a plug to ensure the Net Income will adjust the Retained Earnings such that it matches what was needed from the Balance Sheet. The plug goes to “Currency Exchange Gain/Loss” with the debit/credit in I/S
  6. What are the steps in performing a foreign financial statement translation?
    • Step 1: Ensure the financial statements are in conformance with either GAAP or IFRS (whichever is applicable)
    • Step 2: Translate the Income Statement using the following exchange rates
    • ++ All income statement items = weighted average rate
    • ++ Transfer net income to retained earnings
    • Step 3: Translate the Balance Sheet using the following exchange rates
    • ++ Assets and Liabilities = current/year-end rate
    • ++ Common Stock & APIC = historical rate
    • ++ Retained Earnings: translate the beginning balance, add net income from above, subtract translated dividends.
    • Step 4: Add the debits and credits. The net amount becomes a Translation Adjustment in OCI
  7. An entity owes money (A/P) in a foreign currency transaction in which the goods were received in Oct, but payment isn’t expected until Jan. How must the accounts be determined for the 12/31 year-end financial statements?
    • Any account involving a foreign currency transaction that has not been settled must be adjusted to fair value using the spot rate at the time of the financial statements.
    • Gain or loss is used to adjust the A/R or A/P accounts with debit/credit to Foreign Exchange Transaction Gain/Loss
Author
BethM
ID
337920
Card Set
FAR 6_05
Description
Becker Review 2018
Updated

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