Deck 24: Translation of Foreign Currency Financial Statements

Question 1

The financial statements of a foreign subsidiary with an Australian parent company must:

A) remain in the foreign currency for the purposes of consolidating the financial statements of the Australian parent company.
B) be translated into Australian dollars for the purposes of consolidating the financial statements of the Australian parent company.
C) be translated into Australian dollars for the purposes of presenting the financial statements in the country of its foreign operations.
D) None of these options are correct.

Answer 1

B

Question 2

Which of the following is not an activity economic indicator for determining the functional currency?

A) Autonomy.
B) Retention of funds.
C) Intercompany transactions.
D) Servicing of debt obligations.

Answer 2

B

Question 3

When translating into the presentation currency the translation difference is recognised:

A) in retained earnings.
B) in profit or loss.
C) as a separate component of equity.
D) as an asset or liability, depending on whether it is a debit or credit balance.

Answer 3

C

Question 4

Which of the following items will be regarded as a monetary item when applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates?

A) property, plant and equipment.
B) accounts receivable.
C) land and buildings.
D) inventories.

Question 5

When translating into the functional currency, monetary liabilities are translated using the:

A) exchange rate prevailing at the end of the last reporting period.
B) exchange rate current at the date the item was first recorded.
C) exchange rate current at end of reporting period.
D) closing exchange rate.

Question 6

Banjo Ltd acquired 100% of Wellington Ltd on 1 July 2021. The balance sheet of Wellington Ltd on that date was as follows: $\text { Balance sheet at } 1 \text { July } 2021$
$\begin{array}{llll}&N Z \$&&N Z \$\\\text { Machinery at cost } & 560,000 & \text { Share capital } & 400,000 \\\text { Investment property } & 400,000 & \text { General reserve } & 200,000 \\\text { Receivables } & 100,000 & \text { Retained earnings } & 600,000\\\text { Cash }&140,000&&1,200,000\\&1,200,000\end{array}$ The balance sheet of Wellington Ltd as at 30 June 2022 is as follows:
Balance sheet as at 30 June 2022
$\begin{array}{lll}&N Z \$&&N Z \$\\\text { Machinery - carrying value } & 300,000 & \text { Share capital }&400,000 \\\text { Investment property } & 400,000 & \text { General Reserve }&200,000 \\\text { Receivables } & 500,000 & \text { Retained earnings }&1,000,000 \\\text { Cash } & 600,000 & \text { Accounts payable }&170,000\\&&\text { Income tax payable }&30,000\\&1,800,000&&1,800,000\end{array}$ Relevant exchange rates are as follows:
$\begin{array}{lll}&\mathrm{NZ} \$&A\$\\1 \text { July } 2021 & 1.00= & 0.95 \\\text { 30 June 2022 } & 1.00= & 0.85 \\\text { Average 2021-22 } & 1.00= & 0.90\end{array}$ If the local currency of Wellington Ltd is New Zealand dollars and the functional currency is Australian dollars the total assets of NZ$1,800,000 would translate into Australian dollars as:

A) $1,710,000
B) $1,530,000
C) $1,560,000
D) $1,620,000

Question 7

When translating the revenue and expenses in the statement of profit or loss and other comprehensive income, theoretically each item of revenue and expense should be translated using the spot exchange rate between the:

A) functional currency and the foreign currency on the reporting date.
B) presentation currency and the local currency on the transaction date.
C) presentation currency and the functional currency on the reporting date.
D) functional currency and the foreign currency on the date the transaction occurred.

Question 8

Which of the following factors should be considered when determining the functional currency?

A) Which currency mainly influences the costs of labour and materials?
B) Which currency mainly influences the selling price of the goods and services provided?
C) Which country has the most influence over competitive forces and regulations for the sales price of the goods and services?
D) All of these options should be considered.

Question 9

Bondi Ltd has an investment in Christchurch Ltd. The shares in Christchurch were acquired on 15 April 2074. Christchurch uses the revaluation model to account for equipment. Equipment acquired by Christchurch on 1 May 2015 was revalued on 25 May 2022. The exchange rate used to translate the building into the presentation currency for the year ending 30 June 2022 is the rate that applied on:

A) 1 May 2015.
B) 15 April 2017.
C) 25 May 2022.
D) 30 June 2022.

Question 10

Banjo Ltd acquired 100% of Wellington Ltd on 1 July 2021. The balance sheet of Wellington Ltd on that date was as follows: $\text { Balance sheet at } 1 \text { July } 2021$
$\begin{array}{llll}&N Z \$&&N Z \$\\\text { Machinery at cost } & 560,000 & \text { Share capital } & 400,000 \\\text { Investment property } & 400,000 & \text { General reserve } & 200,000 \\\text { Receivables } & 100,000 & \text { Retained earnings } & 600,000\\\text { Cash }&140,000&&1,200,000\\&1,200,000\end{array}$ The balance sheet of Wellington Ltd as at 30 June 2022 is as follows:
Balance sheet as at 30 June 2022
$\begin{array}{lll}&N Z \$&&N Z \$\\\text { Machinery - carrying value } & 300,000 & \text { Share capital }&400,000 \\\text { Investment property } & 400,000 & \text { General Reserve }&200,000 \\\text { Receivables } & 500,000 & \text { Retained earnings }&1,000,000 \\\text { Cash } & 600,000 & \text { Accounts payable }&170,000\\&&\text { Income tax payable }&30,000\\&1,800,000&&1,800,000\end{array}$ Relevant exchange rates are as follows:
$\begin{array}{lll}&\mathrm{NZ} \$&A\$\\1 \text { July } 2021 & 1.00= & 0.95 \\\text { 30 June 2022 } & 1.00= & 0.85 \\\text { Average 2021-22 } & 1.00= & 0.90\end{array}$ If the functional currency of Wellington Ltd is New Zealand dollars and the presentation currency is Australian dollars the total assets of NZ$1,800 000 would translate into Australian dollars as:

A) $1,560,000
B) $1,530,000
C) $1,710,000
D) $1,620,000

Question 11

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised:

A) as an item of gain or loss in the statement of profit or loss and other comprehensive income.
B) directly in the retained earnings account.
C) as a deferred asset or liability.
D) as a separate component of equity.

Question 12

When translating from the local to functional currency as opposed to the functional to presentation currency differences arise in relation to the treatment of which of the following?

A) Share capital.
B) Cost of goods sold.
C) Depreciation expense.
D) Accounts receivable.

Question 13

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the currency in which the financial statements are presented by the reporting entity is the:

A) economic currency.
B) domestic currency.
C) functional currency.
D) presentation currency.

Question 14

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the:

A) exchange rate at the date when the value was determined.
B) exchange rate current at end of reporting period.
C) closing exchange rate for the financial year.
D) exchange rate at the transaction date.

Question 15

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:

A) first classify the liabilities into current and non-current.
B) first classify the liabilities as monetary or non-monetary.
C) translate all liabilities using the current rate existing at end of reporting period.
D) translate all liabilities using the rate current on entering into the transaction.

Question 16

When translating into the functional currency, foreign currency denominated non-monetary items measured using historical cost must be translated using the:

A) rate current at end of reporting period.
B) average rate for the reporting period.
C) exchange rate at the date of the transaction.
D) rate prevailing at the end of the previous financial year.

Question 17

Post-acquisition date retained earnings that are denominated in a foreign currency are:

A) translated into the functional currency using the average rate since acquisition date.
B) balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.
C) translated into the functional currency using the rates at the end of each year since acquisition date.
D) translated into the functional currency using the rate current at the latest end of reporting period.

Question 18

Monetary items are best described as:

A) plant and equipment.
B) all items that are contingent in nature.
C) all intangible items including goodwill.
D) units of currency held and assets and liabilities to be received or paid in fixed numbers of currency units.

Question 19

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the currency of the primary economic environment in which the foreign entity operates is the:

A) local currency.
B) foreign currency.
C) functional currency.
D) presentation currency.

Question 20

Indicators pointing towards the local overseas currency as the functional currency include:
I. Parent's cash flows are directly affected on a current basis.
II. Production costs are determined primarily by local conditions.
III. Sales prices are primarily responsive to exchange rate changes in the short-term.
IV. Cash flows are primarily in the local currency and do not affect the parent's cash flows.

A) II and IV only.
B) I and III only.
C) I, III and IV only.
D) I, II and IV only.

Question 21

Under AASB 121 The Effects of Changes in Foreign Exchange Rates, an entity must disclose which of the following items in particular?
I. Whether a change in the functional currency has occurred.
II. The amount of exchange differences included in profit or loss of the period.
III. The amount of the exchange difference included directly in share capital during the period.
IV. The reason for using a presentation currency that is different from the functional currency.

A) I and IV only.
B) II and III only.
C) I, II, III and IV.
D) I, II and IV only.

Question 22

Zephyr Limited has the following items in its statement of profit or loss and other comprehensive income: NZ$
Revenue 140 000
Cost of goods sold 85 000
Interest expense 14 000
Income tax expense 12 000
All items arose evenly across the year. The following exchange rates applied:
End of reporting period NZ$1.00 = A$0.90
Average rate for year NZ$1.00 = A$0.85
The net profit after tax translated into the presentation currency of A$ is:

A) $46 750
B) $24 650
C) $34 118
D) $26 100