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March 11, 2013

Conferences and Exercise

Chapter 7 Homework

Questions 1to 5 from pages 393-394

Question 1
Exchange rate- this is the rate at which numerous accounts are translated.
Gains and losses- the way gains and losses are treated is a major issue when dealing with currency translation.

Question 2
A balance sheet is exposed to the foreign exchange if the parent company decides to use the current exchange rate. This exposure can either be a positive exposure or a negative exposure. A negative exposure occurs when the foreign currency depreciates in respect to the home currency. On the other hand, when a foreign currency appreciates it positively exposes the balance sheet. The transaction exposure and the balance sheet exposure are almost similar, however, with the balance sheet, assets and liabilities are exposed.

Question 3
Current exchange rate-The assets and liabilities in this concept are exchanged at the current exchange rate of the foreign currency.
Temporal method of exchange- This is an exchange method which is used in a foreign currency exchange. In this method, the translation of assets and liabilities uses a different exchange rate considering on how they are valued and also how they are created.

Question 4
Temporal method-Under this method assets and liabilities are carried at a historical exchange rate. Either, cash, all payable and receivables are translated using the current rate
Current method-All assets and liabilities are translated at the current rate. On the other hand, it is only equity account which is translated at a historical rate.

Question 5
There are two major modes of transactions regarding foreign operations. Translation can either be at current exchange rate or at a historical rate. Both IAS21 and SFAS 52 clearly determine the translation method and even the disposition adjustment by identifying the functional currency of a foreign operation. A company balance sheet is fully exposed when using a current exchange rate of translation. In the event when the foreign currency appreciation, there will be a positive translation adjustment and when there is a depreciation of the foreign currency, translation adjustment will run into a negative. These are the two factors a Mercedes Benz will consider before deciding on the appropriate method to use.

Chapter 8 Homework

Questions 5, 6, and 7 from page 435

Question 5
There are two major modes of transactions regarding foreign operations. Translation can either be at current exchange rate or at a historical rate. Both IAS21 and SFAS 52 clearly determine the translation method and even the disposition adjustment by identifying the functional currency of a foreign operation. A company balance sheet is fully exposed when using a current exchange rate of translation. In the event when the foreign currency appreciation, there will be a positive translation adjustment and when there is a depreciation of the foreign currency, translation adjustment will run into a negative. These are the two factors a Mercedes Benz will consider before deciding on the appropriate method to use.

Question 6
Both the IFRS and the US GAAP, assets, liabilities, income and also expenses are reported on their functional currency. The functional currency is the currency of the primary economic environment in which the company operates. Nevertheless, the way IFRS determines the indicators of the functional currency differs a great deal. US GAAP premeasures the financial statements of a foreign subsidiary which operates in a highly inflationary economy. This is usually when the parents reporting currency are its functional currency.

Question 7
Functional currency is usually the currency of the primary economic environment in which the company operates. This can either be a domestic currency or a foreign currency. This is the currency in which an entity measures its assets and or liabilities, income and expenses. Both IFRS and US GAAP determines the functional currency pretty the same under ASC830, foreign currency matters and IAS 21 the effects of change in foreign exchange rate. The laws are similar although the provision of translation of a foreign currency is what differs slightly. Both laws require the remeasurement into the functional currency. There are benchmarks which are applied by both laws to determine the functional currency.
Selling price- this is wholly determined by the local factors such as the government laws. It is the currency when the foreign operation’s sales apply in the short run for it to fluctuate the exchange rate.
Market- it occurs when the foreign operation’s sales market is mainly in the parent’s company country.

Other factors that determine the functional currencies are expenses, financing, cash flow and inter- company transactions.

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