Ch09 beechy ism

CHAPTER 9

Reporting Foreign OperationsThis chapter focuses on the theory and practice of translating foreign operations. Two translation methods, temporal and current-rate, are described and illustrated in a simple example. The concept of economic exposure to the risk of changes in foreign exchange rates is then introduced and is contrasted with the accounting exposure. Accounting exposure is a function of the translation method used and is unlikely to reflect the economic exposure. After relating the concept of economic exposure to the alternative translation methods, the IFRS functional currency approach is illustrated in a more complex example. The reporting of translation gains and losses in the parent’s financial statements is discussed quite extensively, since it is the reporting of these gains and losses that caused so much controversy. This chapter is intended to lay the basic foundation for understanding the concepts underlying the different methods of translation and the results of applying the methods in relatively simple situations. There is no intent to be exhaustive in the treatment of the complexities of translating foreign operations. For example, there is no discussion of the interrelationship between inflation adjustments and foreign currency translation. In addition, the statement of cash flows, which is fairly straight-forward under the temporal method but more complex under the current rate method, has not been addressed. We believe that these additional complexities are not essential to an understanding of the basic issues underlying the reporting of foreign operations.

Copyright © 2014 Pearson Canada Inc. 436

Chapter 9 – Reporting Foreign Operations

SUMMARY OF ASSIGNMENT MATERIAL

Case 9-1: Global corp.This is a relatively short case that requires the student to analyze the facts to determine the functional currency of five subsidiaries. Several of the situations described require judgment and provide the student with the opportunity to identify the information that was key in making their decisions.

Case 9-2: Elite Distributors LimitedThis is a straightforward case that illustrates a foreign sales office and subsidiaries with different functional currencies. Consolidation and segment reporting issues are touched upon as well.

Case 9-3: Care Inc.This is also a short case that requires the student to analyze the facts to determine the functional currency of the subsidiary. A description of each of the temporal and current-rate methods of translation is also required.

Case 9-4: Multi-Communications Ltd.This is a past CICA case from 1993 that asks the student to discuss the accounting and auditing implications of specific issues. The issues include foreign exchange gain, investment in a country that is highly inflationary, purchase price adjustment, and other issues. The required could be adapted to have the student only discuss the accounting implications.

Case 9-5: Johnston Co. Ltd.This case addresses the issue of how a foreign operation should be organized in order to achieve the desired financial statement impacts.

Case 9-6: Buy Cartier Ltd.This is a case from an ICAO School of Accountancy practice exam which requires accounting and audit issues that might arise during a meeting with the auditor to be identified and discussed. The main issues to be identified include the acquisition of subsidiaries, a change in presentation currency, pre-operating costs and government subsidies.

P9-1 (30 minutes, easy) This case requires translation of an SFP under each of the two methods; calculation of the accounting exposure and the gain or loss that would result from a further change in exchange rates. It’s a straight-forward problem illustrating the reporting effects of a strengthening foreign currency.



P9-2 (15 minutes, easy) Translation of an SCI under both current rate and temporal methods; includes a detailed cost of goods sold computation and interest expense (accrued during the year but paid at the end of the year). P9-12 builds on P9-2. P9-3 (40 minutes, medium)This problem illustrates the impact of the current rate vs. temporal methods by using a very simple scenario. It highlights the concept of economic exposure and demonstrates the logic underlying the concept of an implicit hedge. It is a good class discussion problem.

P9-4 (15 minutes, easy)This problem on translation of the equipment and accumulated amortization balances when the functional currency of the foreign subsidiary is, in part 1, the same as and, in part 2, is different from the parent's.

P9-5 (35 minutes, medium)The translation of a SFP using the temporal method, a calculation of a translation gain or loss on bonds payable, a calculation of the change in the cumulative translation adjustment account and an explanation of the value calculated when translating capital assets under current-rate method are required.

P9-6 (75 minutes, medium)Translation of the financial statements of a foreign operation assuming a different functional currency from the parent and assuming the same functional currency as the parent.

P9-7 (80 minutes, medium)Identifying, with support, the functional currency of a subsidiary. Translation of the SCI and SFP assuming the functional currency is the same as the parent, including a calculation of the exchange gains/losses. Translation of the SCI and SFP including a calculation of the exchange gains/losses assuming a different functional currency from the parent.

P9-8 (45 minutes, medium)Translation of the SCI and calculation of the foreign exchange gain/loss and specific SFP accounts assuming the same functional currency as the parent. Translation of specific SFP accounts assuming a different functional currency and identification of factors to establish the subsidiary’s functional currency.

P9-9 (90 minutes, difficult)Identification, with support, of the functional currency of a subsidiary. Translation of the financial statements using the current-rate and temporal methods including calculation of translation gains or losses.

P9-10 (35 minutes, medium)



This problem requires the calculation of gain/loss using the temporal and current-rate methods. Translation of SFP and SCI assuming the same functional currency as the parent and assuming a different functional currency from the parent.

P9-11 (20 minutes, medium) Translation of selected data for a comparative SFP, using the temporal method. Some irrelevant information is given, so that the answers are not obvious from the problem.

P9-12 (60 minutes, difficult) Unless the assignment of this problem is limited to requirements 1. and 2., P9-2 must be solved first. This problem requires translation of a comparative SFP under both the current rate and temporal methods, and analysis of the translation gains and losses for the year. The problem requires calculation of translated retained earnings for the subsidiary and requires detailed computation of the components of the net translation loss under the temporal method.

P9-13 (45 minutes, medium)Identification, with support, of the functional currency of a subsidiary. Translation of selected data using the current-rate and temporal methods. Calculation of the translation gain or loss under both the current-rate and the temporal methods.



ANSWERS TO REVIEW QUESTIONS

Q9-1: A foreign currency transaction is a direct transaction of a Canadian company that is denominated in a foreign currency. A foreign currency operation is a subsidiary or a branch that is located in a foreign country and that carries on its business in a foreign currency.

Q9-2:a. Temporal: All monetary balances and balances of items that are reported at current value are translated at the current exchange rate; all other balances are translated at their historical rates. b. Current rate: All balances are translated at the current rate of exchange, although the current rate may be the average for the current year in the case of income statement items.

Q9-3: The temporal method yields results that are the same as would have been obtained had the parent conducted the same transactions directly as foreign currency transactions rather than through a foreign subsidiary.

Q9-4: The common share account of a foreign subsidiary represents the parent’s investment, and is eliminated upon consolidation. The common share account is translated at the historical rate in order to offset the investment account on the parent’s books, which is carried at historical cost.

Q9-5: The accounting exposure is the extent to which gains and losses will result from changes in exchange rates. It is measured as the net balance of items that are translated at the current rate under a particular translation method.

Q9-6: Under the temporal method, the accounting exposure is the net balance of monetary assets less monetary liabilities (plus items reported at current value). For companies that use long-term debt as a source of financing, the accounting exposure is usually a net liability exposure. Under the current-rate method, the accounting exposure is the net assets, which is the same as the shareholders’ equity of the foreign subsidiary.

Q9-7: Yes. The accounting exposure under the temporal method often is a net liability position, in which case a strengthening of the foreign currency will result in a translation loss. Under the current rate method, however, the accounting exposure is almost always a net asset position; a strengthening of the foreign currency will then result in a translation gain.

Q9-8: Economic exposure is the extent to which the changes in the relative values of the currencies impact on the earnings ability of the foreign subsidiary. Economic exposure therefore is forward-looking and is difficult to measure, while accounting exposure is backward-looking and is the mechanical result of the application of a translation method.



Q9-9: A net liability accounting exposure does not necessarily represent an economic exposure. Only if the debt will be repaid in Canadian dollars within the foreseeable future will there be a realization of any exchange loss arising from a strengthened foreign currency. If the foreign operation will refinance its debt in the foreign currency or will generate sufficient earnings in the foreign currency to service the debt, then there is no economic exposure in terms of Canadian dollars. If Domop management hedges the accounting exposure, then Domop is entering into a real economic exposure in order to hedge an accounting exposure that may not be real in economic terms. The result will be that instead of offsetting an existing economic risk, the hedge will be creating a risk where none existed before. Domop should not hedge the liability exposure unless it is reflective of its economic exposure to changes in the exchange rates.

Q9-10: The functional currency is the currency of the primary economic environment in which the entity operates, which is normally the environment in which it generates and expends cash. If Canada is the primary economic environment in which the parent operates, then the parent’s functional currency is the Canadian dollar. The functional currency is the currency used to measure an entity’s transactions.

Q9-11: The temporal method is recommended for translating the results of foreign operations with the same functional currency as the parent. The temporal method yields the same results as would have been obtained had the parent conducted its foreign business by means of direct foreign currency transactions rather than through a foreign operation. Since the foreign operation is, in essence, an extension of the parent’s own operations, a translation method that gives the same outcome as foreign transactions is appropriate.

Q9-12: The recommended disposition of translation gains and losses is to report them in the same manner as gains and losses arising from foreign currency transactions, which are reported in income.

Q9-13: In determining its functional currency, management of a company should first look to the following factors:

1. The currency that influences the selling prices for its goods and services. IFRS note that this will often be the currency in which prices are denominated and settled.

2. The currency of the country whose competitive forces and regulations determine the selling prices for its goods and services.

3. The currency that influences its costs of providing goods and services. IFRS note that this will often be the currency in which these costs are denominated and settled.

If the functional currency is not easily determined from the primary factors above, management of a company should also consider the following factors in determining its functional currency.

1. The currency in which financing activities are conducted. This would encompass the issuing of debt and selling of shares.



2. The currency in which cash from operating activities is kept.3. Whether the activities of the foreign operation are conducted independently of the

parent or as an extension of the parent. 4. Whether the foreign operation conducts a low or high proportion of its activities

with the parent.5. Whether the cash flows of the foreign operation directly affect the cash flows of

the parent and are readily available to the parent.6. Whether the cash flows of the foreign operation are sufficient to service its debt

obligations without the need for funds from the parent.

It is often the case that the determination of the functional currency is not obvious from the above factors. The selection of a functional currency in these situations is a matter of professional judgment. The choice should be the one that most faithfully represents the economic impact of the activities of the company.

Q9-14: Each foreign operation is evaluated individually when the parent company management is determining the functional currency of its foreign subsidiaries. Some of its subsidiaries may have the same functional currency as Mammoth Corporation while others may have a different functional currency.

Q9-15: The current-rate method is recommended to be used for foreign operations with a different functional currency than the parent's.

Q9-16: The average rate is used for the income statement items because this method results in the same amounts in the presentation currency regardless of how a foreign operation is translated into the presentation currency. For example, this method will provide the same results if the subsidiary is directly translated into the presentation currency or if the subsidiary is first translated into the functional currency of the parent and then into the presentation currency. (Another reason for its use is so that the interim earnings will accumulate to the annual earnings. If the closing rate (that is, at the balance sheet date) were used on the annual income statement, there would be an undesirable change in reported earnings caused not by last-quarter earnings but simply as the result of using a different exchange rate for the quarterly statements than for the annual statement).

Q9-17: Under the current-rate method, cost of goods sold is translated by multiplying the cost of goods sold in foreign currency by the average exchange rate for the year. Under the temporal method, the cost of goods sold is disaggregated and the opening inventory, purchases, and closing inventory are each multiplied by the appropriate historical exchange rate for that component of cost of goods sold. The Canadian dollar cost of goods sold is then derived from the translated components rather than being obtained directly by multiplying the cost of goods sold by a single exchange rate.

Q9-18: Under the current rate method, depreciation and amortization are translated at the average rate of exchange for the year. Under the temporal method, depreciation and amortization are translated at the historical exchange rates that apply to the individual assets being depreciated or amortized.



Q9-19: The gain or loss on monetary items is calculated by constructing a flow of funds schedule. Starting with the beginning net balance of monetary items, flows during the year are added and subtracted to derive the ending net balance of monetary items. The balances and flows in the foreign currency are then translated at the rates in effect when those balances existed and flows occurred. The difference in the derived Canadian dollar ending balance and the actual foreign currency balance translated at the year-end rate is the gain or loss for the period. The amount of gain or loss on net monetary items will not be affected by the overall translation method used, because monetary items are translated the same way under both translation methods.

Q9-20: In highly inflationary economies, the solution recommended in IFRS is to adjust the foreign operation’s financial statements for changes in the price level in the foreign country. The adjusted statements are then translated using the closing rate for all amounts (assets, liabilities, equities, revenues and expenses).

CASE NOTES

Case 9-1: Global Corp

Objectives of the Case

The objective of this case is to have students determine the functional currency of five subsidiaries of Global Corp. Judgment is required and students are asked to identify the information that was key to making their decisions.

Indogold IncThe functional currency is the currency of the primary economic environment in which an entity operates. The primary economic environment is “normally the one in which it primarily generates and expends cash” (IAS 21). Notice that the focus is on the cash generated or spent therefore we will ignore depreciation costs because they are non-cash costs. IAS 21 suggests that in determining their functional currency, an entity should look to certain primary indicators first. These indicators relate to the currency “influences” on the selling price of gold and the currency “influences” on the costs (labour, material and supplies) to extract the gold. In Indogold’s case, its product, gold, is priced in US dollars, therefore the US dollar is the currency that influences the sales price. Indogold’s cash costs, although primarily local (50%), also have a significant US dollar cost (40%). Thus the evidence on costs is mixed. An assessment of these facts would likely lead to the conclusion that the functional currency for Indogold is the US dollar primarily because of the obvious US dollar influence on revenue in conjunction with a mixed picture on costs.

Structured EntityThe structured entity is just a vehicle used to obtain and finance drilling equipment. It does not have any operations therefore it would difficult to use the primary indicators to determine the functional currency. Several of the secondary indicators may be of interest.



First note that IAS 21 suggests the currency in which financing activities are conducted could be considered. In this case, the Euro was the “financing” currency therefore one could be tempted to identify it as the functional currency. However, the other secondary indicators should also be considered, in particular, the indicator that seeks to assess the autonomy of the entity. If the entity is not autonomous then its functional currency is that of its parent. In this situation, the financing was intercompany financing between the parent and the SE. Further, given that the SE has no employees of its own and is controlled by Global employees, it should be obvious that the SE is not independent of its parent. In this case, the functional currency of the SE should be that of its parent, that is, the Canadian dollar.

Northern PatriotsIAS 21 suggests that in determining their functional currency, an entity should look to the primary indicators first. These indicators relate to the currency “influences” on the selling price of goods and the currency “influences” on the costs (labour, material and supplies) to sell the goods. In Northern Patriots’ case, its product selling prices are determined by local competition (in US dollars), therefore the US dollar is the currency that influences the sales price. Northern Patriots’ cash costs are mixed as its cost of goods sold is priced in Canadian dollars but all other selling and administrative costs are priced in US dollars. Although the evidence is mixed, the strongest evidence at this point is that the US dollar is the functional currency.

The question arises as to whether management should proceed further to consider the secondary indicators. This is a difficult question to answer and it will require considerable professional judgment. It is clear that IAS 21 suggests that the primary indicators are to be considered first. If a decision can be clearly made based on the primary indicators, then the secondary indicators should not be considered. However, given that the evidence is mixed for Northern Patriots, it may be that the case has not provided sufficient evidence to allow an professional assessment of initial prognosis. We would likely need more information before a definitive answer can be given. (For example it would be useful to know the percentage of costs that are denominated in US dollars.) If we can be confident that the functional currency is the US dollar, then there is no need to proceed further.

If management do not believe that they have conclusive evidence as to the functional currency, they should proceed to examine the secondary indicators. In this case, there is evidence to suggest that Northern Patriots is not independent of Global. Northern received all its financing from Global and further it remits all excess funds to Global. It would be very useful to know the volume of intercompany transactions as clearly the cash flows of Northern could impact the cash flows of Global. If management believes that it had to proceed beyond the primary indicators and if there is evidence that Northern is not autonomous, then the functional currency may be determined to be the Canadian dollar. If however Northern does possess substantial autonomy, then management could determine that the functional currency is the US dollar. In summary more information is needed, first, to be able to assess whether management should proceed to considering the



secondary indicators and, second, to assess the degree of autonomy of Northern if management proceeds to the secondary indicators.

East Asia Holdings CorporationEast Asia Holdings is a holding company that has no operations. The first two primary indicators are not useful to the determination of the its functional currency because it does not generate cash through the sale of goods or expend cash for labour and materials. Further, with respect to the secondary indicators, it does not retain any dividends received but forwards them to Global. Thus it does have any cash on hand and further it is not involved in financing activities. It appears to be engaged in activities that the parent could easily have done itself. Further there is no evidence to suggest that it is independent of the parent. East Asia appears to be operating as an extension of the parent itself and therefore the functional currency should be the same as the parent, that is, the Canadian dollar.

Japan ManufacturingJapan Manufacturing’s product selling prices are determined by local competition (in Japanese Yen), therefore the Japanese yen is the currency that influences the sales price. Japan’s cash costs are all are priced in Japanese yen therefore the yen is the currency that influences its costs also. The evidence from both primary indicators is clear and strong that the Japanese yen is the functional currency of Japan Manufacturing. Given this conclusion, the secondary indicators should be ignored. (However it can be noted that the secondary indicators also suggest the yen is the functional currency because they suggest that Japan Manufacturing is independent of Global.)

Case 9-2: Elite Distributors Limited


The objective of this case is to see if students can recognize the difference between a foreign operation with a different functional currency from the parent, a foreign operation with the same functional currency as the parent, and a foreign sales office that conducts foreign currency transactions for the domestic parent company.

U.S. Sales Office

The U.S. sales office is a branch, not a foreign subsidiary. It conducts no independent activities but simply serves one operating function for the home office. Therefore, all transactions through the sales office should be treated as foreign currency transactions, and translated by the temporal method. The home office is fully exposed to the revenue consequences of fluctuations in the US-Canada exchange rate.

It is not necessary to decide whether the U.S. office is a foreign operation or not. A foreign operation need not be separately incorporated, but it is unlikely that an unincorporated foreign operation would be self-sustaining. It is the nature of the



relationship between the home office and the foreign operation that indicates the way in which foreign denominated transactions should be treated by the home office.

Since the U.S. office is not a subsidiary, consolidation is not an issue.

Singapore Subsidiary

The Singapore subsidiary is a supply source for the Canadian parent. Substantially all of the Singapore subsidiary's output is sold to the parent, and therefore it is obvious that the Singapore sub’s functional currency is the Canadian dollar. The parent company is exposed on a day-to-day basis to the risk of exchange rate changes on the cost of production. The temporal method of translation would most nearly match the economic exposure of the parent. If the Singapore currency strengthens, relative to the Canadian dollar, Elite will be worse off, and the temporal method will show that result in this instance.

The Singapore sub is an integral part of Elite’s operations. The translated financial statements of the Singapore subsidiary should be consolidated with those of Elite. Gains and losses on current transactions and monetary balances should be reported in income. Exchange gains and losses arising from prior years are included in opening retained earnings.

Ireland Subsidiary

The Irish subsidiary is an autonomous company, operating in its own economic environment without reliance on or interaction with the parent company or its management. In an economic and operating sense, the Irish sub’s functional currency is the Irish pound, and Elite’s investment in Ireland will be enhanced if the Irish pound strengthens. Therefore, the economic exposure suggests that the current rate method of translation should be used, with all exchange gains and losses for the current period included in other comprehensive income and exchange gains and losses arising from prior years included in accumulated other comprehensive income.

Since the Irish subsidiary represents a part of Elite’s diversified activities and since Elite has control over the net assets of the Irish sub, the sub’s statements should be consolidated with those of Elite, especially if the sub’s accounting policies are consistent with those of Elite.

Other Issues

Consistency of accounting practices is a requirement for consolidation, as noted in the above paragraph. When the subsidiary’s functional currency is the Canadian dollar , there is no reason that the parent cannot require consistent practices. In a non-wholly owned foreign subsidiary, however, it may not be possible or practical for the parent to insist on the subsidiary’s using the same GAAP as the parent. Where foreign country GAAP is used, the parent needs to convert the results of operations to the same GAAP as the parent, especially when a Canadian company buys a going concern. In this case, it is likely that both the Irish sub and the Canadian parent are using IFRS, therefore it is not likely to be an issue here.



Reporting on the purchase basis will be required for Elite’s acquisition of 80% of the Ireland company. Any fair value increments/decrements will have to be amortized. The 20% minority interest will be reported on the parent company basis, by showing 20% of the book value of the subsidiary’s net assets as “non-controlling interest” on the equities side of Elite’s consolidated balance sheet.

Segmented reporting will be appropriate for Elite if it has securities in the public markets and if either export sales or the assets or revenues of the Irish subsidiary constitute 10% of the consolidated amounts. Both geographic and business segments may be reportable, since the Irish subsidiary is both in a foreign country and in a different line of business.

Case 9-3: Care Inc.


The objective of this case is to determine a subsidiary’s functional currency. Also, students are required to describe the differences between the two translation methods. This case is from the UFE Report 1994 and the following is the suggested approach for the question. Note that the discussion is in terms of self-sustaining or integrated subsidiary but the results are directly comparable to a discussion of a subsidiary with a non-Canadian dollar functional currency and one with a Canadian dollar functional currency.

Part 1

ShoeCo is a self-sustaining foreign operation of CI (i.e., ShoeCo’s functional currency is the “foreign currency”) since it is financially and operationally independent of CI, the reporting enterprise. This conclusion is based on the following factors:

- Cash flows of CI are insulated from the day-to-day activities of ShoeCo.- Sales prices for most of ShoeCo’s products are determined by local

competition.- The sales market for ShoeCo’s products is primarily outside of Canada.- Labour, materials and other costs of ShoeCo’s products are primarily local

costs.- The day-to-day activities of ShoeCo are financed primarily from its own

operations and local borrowing.- There is very little interrelationship between the day-to-day activities of

ShoeCo management and those of CI.- CI’s exposure is limited as the prices for its purchases are fixed in Canadian

dollars.



Part 2

Description of the Temporal Method

The temporal method translates assets, liabilities, revenues and expenses in a manner that retains their bases of measurement in terms of the Canadian dollar, i.e. the Canadian dollar is the unit of measure. The items are translated in the reporting enterprise in the following manner:

- Monetary items are translated at the rate of exchange in effect at the balance sheet date.

- Non-monetary items are translated at historical exchange rates, unless such items are carried at fair value, in which case they are translated at the rate of exchange in effect at the balance sheet date

- Revenue and expense items are translated at the rate of exchange in effect on the dates they occur (average rate).

- Depreciation and amortization of assets translated at historical exchange rates are translated at the same exchange rates as the assets to which they relate.

The determination of net income for the current period should include any exchange gain or loss of the reporting enterprise that arises on translation or settlement of foreign-currency-denominated monetary items or non-monetary items carried at fair value.

Description of the Current-rate Method

The current-rate method translates assets, liabilities, revenues and expenses in a manner that retains their bases of measurement in terms of the foreign currency, i.e. the foreign currency is the unit of measure. The items are translated in the reporting enterprise in the following manner:

- Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date, and

- Revenue and expense items are translated at the rate of exchange in effect on the dates on which such items are recognized in income during the period (average rate).

Any exchange gains and losses arising from the translation of the financial statements of a self-sustaining foreign operation are included in other comprehensive income, except when the economic environment of the foreign operation is highly inflationary.



Conclusion

Since ShoeCo is a self-sustaining operation (i.e., ShoeCo’s functional currency is the “foreign currency”), its financial statements should be translated using the current rate method.

[CICA]

Case 9-4: Multi-Communications Ltd.


The objective of this case is to provide the students with a variety of issues, the accounting and audit implications of which they need to explain. These issues include a cumulative foreign exchange gain, investment in a country with high inflation, purchase price adjustment and others. This case is a modified case from the UFE Report 1993 and the following is the suggested approach for the question. Amendments have been made for subsequent changes to GAAP.

Suggested Approach

Memo to: Mr. R. Allen, CFOFrom: CA, Finance DirectorSubject: Accounting and auditing issues for fiscal 20X8

As MCL is a public company, the auditors are aware that our main objective is to present to investors the best possible picture of profits. However, the auditors may believe that accounting policies chosen are too aggressive. The report that follows recommends and seeks to justify the selection of accounting policies with reference to generally accepted accounting principles (GAAP). The auditors will look at the substance of each transaction before recommending an accounting treatment and will concentrate on unusual transactions that have arisen this year. My report focuses on these transactions.

Change in Presentation Currency

In order to decide whether the change in presentation currency to US dollars should be applied prospectively or retroactively, we first look to IAS 21. Unfortunately IAS 21 does not address this issue. The change in presentation currency is similar to a change in



accounting policy and therefore guidance can be found in IAS 8. Under IAS 8, the change should be implemented retrospectively unless it is impracticable.

Treatment in Current and Prior Years’ Financial Statements of Existing Cumulative Gains from Foreign Exchange Arising from the US Operations

The cumulative foreign exchange gain consists of the common shares translated at the historic rate, the retained earnings translated at the rate in effect each year, and the balance of the accounts translated at the current rate. The question is how this cumulative gain should be handled in the financial statements given that the presentation currency is changing to the US dollar. Since IAS 21 is silent on how to treat changes in presentation currency, we can look to IAS 8. If the financial statements are retroactively restated, then to the extent that the gain arose from translating operations whose functional currency was the US dollar, the present cumulative foreign exchange gain disappears. However to the extent that operations existed whose functional currency was not the US dollar, but another foreign currency, then a new cumulative exchange gain or loss will exist. In addition, operations whose functional currency was the Canadian dollar (the previous presentation currency) will also produce a cumulative exchange gain or loss on restatement. In summary, the change in presentation currency will likely result in the elimination of much of the current cumulative foreign exchange gain but will also result in the creation of a new cumulative foreign exchange gain or loss.

Translation of Canadian Operations to US dollars in the Current Year

Since the financial statements will be prepared in US dollars, the Canadian operations will have to be translated into US dollars. The current-rate method should be used.The auditors will require full disclosure in the notes of the nature of the changes and their impact on the financial statements. (Note that it is not clear whether the functional currency of the parent has also changed. If it has, changes in functional currency are accounted for prospectively.)

Investment in High Inflation Country

We must determine how to account for the South American company that we purchased this year. The following two options are available:

1. Record the investment at cost. This method would benefit MCL because it does not require MCL to recognize the losses expected in the early years. The investment cannot, however, be recorded at cost if MCL has control over the company purchased. It could be argued that the government's past record of instability would impede MCL’s control over the company in the future. If the argument that the government is unstable is made too strongly then the auditors may maintain that the value of the investment has been impaired and require a write-down.



2. Consolidate the investment. The auditors will examine the facts to determine the substance of the transaction. The conditions imposed by the government do not impede MCL’s rights to the future economic benefits produced by the company. The restrictions are very similar to those imposed by Canadian regulations (although perhaps more restrictive) and do not appear to impede control. In addition, the government is democratic and wishes to open up its borders. It is therefore unlikely the government will do anything to tarnish its image and inhibit potential future investment.

The auditors will look for evidence to determine whether MCL has effective control of its investment. They will look at such factors as MCL’s control over dividend payments and the appointment of the radio network’s board members and key executives. Even though the government may have been unstable in the past, it appears to be stable now.

Therefore, the auditor will probably want MCL’s management to consolidate the new company. The IFRS guidelines in IAS 29 should be used to determine if the country is a “highly inflationary” economy. If it is, the financial statements will have to be adjusted for changes in the price level of the country. The adjusted amounts will be translated using the closing exchange rate for all amounts (including equity, revenues and expenses).

Diversified Holdings (PH)

The purchase price of Peter Holdings (PH) must be allocated to the net assets acquired. The longer the delay in making the allocation, the more likely it is that events in the intervening period will have affected the values. Since the operations that have been sold are spread out and not part of MCL’s core business, it is reasonable that the allocation might take some time. IFRS 3 should be consulted to determine the appropriate measurement period but this period cannot exceed one year.

The fact that the assets were purchased with the intention of disposing of some of them affects the method of determining the value assigned to each asset. Any assets disposed of will be valued at their net realizable value as opposed to their going concern value. The auditors will require the values used to be substantiated.

The allocation of the purchase price is only an estimate and therefore the auditors will accept the fact that the actual values may vary. The gain on sale of the hotel and recreational property may have resulted from an inappropriate allocation of the purchase price. If that is the case, some consideration should be given to adjusting goodwill or some other asset on the balance sheet. Adjusting the goodwill balance will likely result in a smoothing affect as goodwill is not amortized and only written down if impaired. MCL may prefer this treatment.

The auditors may be concerned that income is overstated. However, if there is no reasonable basis to arrive at a more appropriate allocation of the purchase price, then the entire gain should be reflected in income of the period.



The auditors will want to know how MCL has accounted for the remaining non-communication assets not yet disposed of. Few accounting alternatives are available. These assets can be segregated on the balance sheet if there is a formal plan of disposal. Otherwise, the assets will be recorded as part of continuing operations.

Internally Generated Intangibles

This year MCL has capitalized $60 million as intangibles. This is the appraised value of internally generated intangibles, the costs of which have been expensed over the past ten years.

There may be an argument for capitalizing the cost of subscription drives. The argument hinges on whether the subscription drives are required in order to replace subscribers lost due to normal attrition or whether such drives are a major effort undertaken only every few years. If the cost arises annually, then it should not be capitalized as it is recurring. However, if the cost increases the subscription base and this increase will last for more than the current period, then capitalization may make sense. Since GAAP allows companies to capitalize the cost of self-constructed assets, why not capitalize self-generated intangibles? The answer is because IAS 38 specifically requires that expenditures on advertising and promotion activities (i.e., “advertising, cold calls and free products”) be expensed.

After initial recognition, IAS 38 allows for the use of the cost model or the revaluation model. The use of the revaluation model for these intangibles is also unlikely. An active market for the intangible assets must exist before the revaluation model can be used. Because most intangibles are unique, it is highly unlikely that an active market exists. Further, the existence of a recent purchase or sale of a similar intangible asset is not evidence of an active market. The auditors are therefore unlikely to accept the use of an appraised value as the basis for the valuation of intangibles. The use of appraisals is generally restricted to tangible assets and in very specific circumstances.

Intangibles

Intangibles must be amortized. MCL should have amortized the intangibles in its December 31, 20X7 financial statements.

There are two types of intangibles, those that are expected to provide benefit for a finite period of time and those that are expected to provide benefit for an indefinite period of time. Intangibles with an expected useful life that is finite are amortized over that period. Intangibles with an indefinite life are not amortized but tested for impairment on an annual basis. Since the licenses are expected to increase in value over time, an argument can be made to not amortize them, with no impact on the income statement.



The auditors will want evidence that the expected cash flow stream, or expected future benefit, from the licenses is indefinite. They will also require a valuation of the licenses on an annual basis to test for impairment.

Fibre Optic Cables

MCL has invested in the installation of fibre optic cable. To satisfy MCL’s objective, the cost of installation should be capitalized. The cost should be spread evenly to all 36 cables or to the six cables that MCL is currently using. Allocating the cost to the 36 cables installed will increase net income by reducing the cost of goods sold.

Purchasers of the cables must pay a monthly annual fee to cover their share of all maintenance expenses. The fee can be recorded as revenue or can offset maintenance expenses.

More information is required on the cables that are being leased to determine whether they should be recorded as a capital or sales-type lease.

[CICA adapted]

Case 9-5: Johnson Co. Ltd.


Since the method used to translate a foreign operation can have a substantial impact on the consolidated financial statements of the parent corporation, it is logical for the parent to attempt to structure its foreign operations in such a way as to obtain the most desirable financial statement impacts. This case focuses on that issue with a purely qualitative approach.

Objectives of Financial Reporting

A major reporting objective of Johnston’s managers is to show steady growth in sales and earnings. Future growth will be obtained through the U.S. market, and since the U.S. market is much larger than the domestic Canadian market, the U.S. sales could eventually be larger than the Canadian sales. The translation method should therefore not cause high or unexpected volatility due to exchange rate changes.

Another objective is management evaluation. Johnston’s financial reporting is most likely International GAAP, since its shares are traded on the TSX.

Proposal 1 — Sales Offices

Because orders would be filled from Canadian warehouses, the sales offices would be merely distribution centres and would be deemed to have the same functional currency as



the parent. Therefore, the temporal method of foreign currency translation would be applicable. That is, at the transaction date for a sale, expense incurrence, etc., the amount would be translated at the exchange rate in effect at that time. At the balance sheet date, assets and liabilities such as receivables and payables would be translated at the exchange rate in effect then. The volume of receivables would likely be much higher than U.S. payables for expenses such as salaries and rent. Thus, if there are fluctuations in the exchange rate over the period, there will be a net exchange gain or loss which must be included in income for the same period. Earnings may be quite volatile due to exchange rate changes over which the company has no control.

Proposal 2 — Subsidiary

The financial statements of the subsidiary will be translated before being consolidated with those of Johnston. The translation process will likely produce an exchange gain or loss, the treatment of which will depend on the functional currency of the subsidiary. This classification indicates the exposure of Johnston to exchange rate changes. Some criteria used to determine the classification are:

1. The currency that influences the selling prices for its goods and services. IFRS note that this will often be the currency in which prices are denominated and settled.

2. The currency of the country whose competitive forces and regulations determine the selling prices for its goods and services.

3. The currency that influences its costs of providing goods and services. IFRS note that this will often be the currency in which these costs are denominated and settled.

If the functional currency is not easily determined from the primary factors above, management of a company should also consider the following factors in determining its functional currency.

4. The currency in which financing activities are conducted. This would encompass the issuing of debt and selling of shares.

5. The currency in which cash from operating activities is kept.

6. Whether the activities of the foreign operation are conducted independently of the parent or as an extension of the parent.

7. Whether the foreign operation conducts a low or high proportion of its activities with the parent.

8. Whether the cash flows of the foreign operation directly affect the cash flows of the parent and are readily available to the parent.

9. Whether the cash flows of the foreign operation are sufficient to service its debt obligations without the need for funds from the parent.



Canadian Dollar as Functional Currency

If the subsidiary has the Canadian dollar as the functional currency, then the financial statements will be translated using the temporal method.

This means that the effect of a change in the exchange rate will be the same for Johnston as if it had undertaken the subsidiary’s transactions itself. Exchange gains or losses will be included in income for the period except for portions included in income of previous periods. This would produce potentially volatile earnings.

U.S. Dollar as Functional Currency

If the subsidiary has the US dollar as the functional currency, then the financial statements will be translated using the current-rate method. In this case, Johnston’s exposure to exchange rate changes would be limited to its net investment in the subsidiary. Assets and liabilities will be translated at the rate of exchange in effect at the balance sheet date. Revenue and expense items will be translated at the rate of exchange in effect on the dates on which the items are recognized in income of the subsidiary. An exchange gain or loss will arise when the exchange rate changes. However, under this method, the gain or loss for the current period will be included in other comprehensive income of Johnston and accumulated gains and losses will be included in accumulated other comprehensive income. This will produce less volatility in earnings than the temporal method.

Recommendation

The current-rate method appears to be most desirable to satisfy the company’s objective of a steady growth in earnings. Thus, a subsidiary should be established in such a manner that the US dollar is the functional currency. This means that the operations should be as independent as possible from those of Johnston. Financing the subsidiary in the United States and servicing the debt with the subsidiary’s earnings will make a US dollar functional currency classification appear reasonable as well as being advantageous because of the exchange gain or loss deferral.

[SMA, adapted]

Case 9-6: Buy Cartier Ltd.


The objective of this case is to provide the students with a variety of issues, the accounting and audit implications of which they need to explain. The main issues include



the acquisition of subsidiaries, a change in presentation currency, pre-operating costs and government subsidies.

This case is from The Institute of Chartered Accountants of Ontario’s 2002 Practice Exam Two and the following is the suggested approach (adapted for subsequent changes to GAAP).

Report to Mr. Butler Regarding Buying Cartier Ltd. (BCL)

Overview

Past disagreements with the auditors indicate that the auditors may have concerns about aggressive accounting policies. BCL’s objectives are to present high earnings and a favourable financial position and to meet the publicized objectives to double revenues within 5 years. My approach in the following analysis is to attempt to meet BCL’s objectives within the constraints of GAAP.

Materiality and Audit Fees

The auditors’ objective is to determine and report the substance of transactions. Their concern will be with material, unusual transactions. Acquisitions during the year and reliance on other auditors for material subsidiaries will increase audit risk. We should expect that the auditors will increase their level of testing, which will increase audit fees.

Acquisition of Alltrans

Management bonuses should be examined to determine if they should be considered a cost of the business combination. IFRS 3 provides guidelines to help determine if contingent consideration like bonuses is part of the cost of the combination or remuneration to employees. I recommend that they be expensed in the year paid as it appears that the bonuses should be treated as remuneration for the following reasons: (1) the bonuses are based on key members of management continuing their employment; (2) the employment period is for the same length as the bonus payments; and (3) the bonus payments are based on a percentage of operating results.

The purchase price discrepancy is –$18M (that is, US$42.2M + $20M goodwill –$80.2M deferred income taxes). We need to determine fair values of tangible and intangible net assets. The value of the inner-city bus contract may be considered an intangible asset and therefore subject to amortization and the annual test for impairment. The excess cost of the purchase over the fair value of identifiable tangible and intangible assets should be recorded as goodwill. If there is no excess it creates negative goodwill. We would prefer to maximize the amount of the purchase price discrepancy allocated to goodwill, as goodwill is not amortized. It meets our objective of presenting high earnings and a favourable financial position. Goodwill is subject to an annual check for impairment and negative goodwill is recognized as a gain on bargain purchase in the consolidated SCI in



the year of purchase. The auditors will require evidence to support fair values and allocation of purchase price.

BCL should consolidate post acquisition operations of Alltrans for the period May and June 20X5. The auditors will require an audit or review of the transactions for the stub period from July to September to determine if any significant transactions need be accounted for or disclosed. They will also do a subsequent events review up to the date of the audit report on BCL. Our financial statements will need to disclose the non-coterminous year-ends of BCL and Alltrans.

The accounting policies of Alltrans will need to conform to IFRS for consolidation. The auditors will need to perform procedures to determine if reliance on Alltrans auditors is warranted. This will increase the audit fees as R&R will likely want to review the auditors’ working papers.

Change in Presentation Currency

The change in presentation currency is the result of the Alltrans acquisition. In order to decide whether the change in presentation currency to US dollars should be applied prospectively or retroactively, we first look to IAS 21. Unfortunately IAS 21 does not address this issue. The change in presentation currency is similar to a change in accounting policy and therefore guidance can be found in IAS 8. Under IAS 8, the change should be implemented retrospectively unless it is impracticable.

Treatment in current and prior years’ financial statements of existing cumulative gains from foreign exchange arising from the US operations

The question is how the cumulative foreign exchange gain of $16 million should be handled in the financial statements given that the presentation currency is changing to the US dollar. Since IAS 21 is silent on how to treat changes in presentation currency, we can look to IAS 8. Under IAS 8 the financial statements are retroactively restated. Given the gain arose from translating operations whose functional currency was the US dollar, the present cumulative foreign exchange gain disappears. However to the extent that operations existed whose functional currency was not the US dollar, but another foreign currency, then a new cumulative exchange gain or loss will exist. In addition, operations whose functional currency was the Canadian dollar (the previous presentation currency) will also produce a cumulative exchange gain or loss on restatement. In summary, the change in presentation currency will likely result in the elimination of much of the current cumulative foreign exchange gain but will also result in the creation of a new cumulative foreign exchange gain or loss.

Translation of Canadian Operations to US dollars in the Current Year

Since the financial statements will be prepared in US dollars, the Canadian operations will have to be translated into US dollars. The functional currency of the Canadian operations is the Canadian dollar based on the fact that corporate management decision-



making is based in Canada. The current-rate method should be used. A foreign exchange exposure and a new cumulative foreign exchange gain/loss will result. It should be classified separately in equity (as part of accumulated other comprehensive income). The current year gain or loss will be included in other comprehensive income.

The auditors will require full disclosure of the nature and effect of the change in the presentation currency on the financial statements. (Note that it is not clear whether the functional currency of the parent has also changed. If it has, changes in functional currency are accounted for prospectively.)

Investment in Transcom SA

Pursuant to the provisions of IAS 16, start-up costs cannot be capitalized.

A decision is needed on whether to consolidate the subsidiary or to account for it using the cost or equity method. The cost method may be appropriate given that BCL may not have control over the subsidiary operations as the government’s approval of designs is required and the government will regulate rates and schedules. However, even if BCL does not have control, the equity method of accounting may be appropriate as BCL may exercise significant influence over the subsidiary as Transcom is using BCL’s engineers and designs. Consolidation may be appropriate as the government involvement does not impede rights to future economic benefits and BCL bears the risks associated with the foreign operation. The government’s on-going involvement is similar to the role of Canadian regulatory authorities.

I recommend that we consolidate Transcom. The facts support consolidation to comply with GAAP and presenting consolidated statements would meet the objectives of presenting high earnings and a strong financial position. If we consolidate, we will need to determine the functional currency of Transcom SA.

An argument can be made that the functional currency is the Canadian dollar and is supported by the fact that BCL management and Canadian engineers are involved in the daily operations of the subsidiary. The temporal method will result in the inclusion of unhedged exchange gains/losses in the determination of income.

The argument that the Peruvian soles is the functional curency is supported by the fact that involvement of BCL personnel at the start-up phase does not mean that future operations will be mandated by BCL. Services are provided and revenues determined locally in a rate-regulated environment. The conditions of the government subsidy indicate a heavy local employee component. The current-rate method will result in the inclusion of foreign exchange gains and losses in other comprehensive income.

The IFRS guidelines in IAS 29 should be used to determine if Peru is a “highly inflationary” economy. If it is, the financial statements will have to be adjusted for changes in the price level of the country. The adjusted amounts will be translated using the closing exchange rate for all amounts (including equity, revenues and expenses).



In order to determine the appropriate treatment, the auditors will require further information on cash flows and financing plans. From BCL’s perspective, consolidating the operation is preferable as we anticipate that the subsidiary will be profitable, and our objective of presenting high earnings and a strong financial position is met.

Government subsidies should be recorded as a reduction of the cost of transit equipment or deferred and amortized over the same period as the transit equipment. Conditions associated with the repayment of subsidies should be disclosed. The auditors will require evidence to support compliance with the terms of the subsidy. We will need to discuss with the auditors the most cost effective way of obtaining audit evidence at September 30, 20X5.

SOLUTIONS TO PROBLEMS

P9-1

a. Translated statements of financial position:

(I) Current rate (II) Temporal

Cash H 40,000 @$1.60 $64,000 @$1.60 $64,000Accounts receivable 20,000 @$1.60 32,000 @$1.60 32,000Inventory (at market) 120,000 @$1.60 192,000 @$1.60 192,000Capital assets 400,000 @$1.60 640,000 @$1.30 520,000Accumulated depreciation

(160,000) @$1.60 (256,000) @$1.30 (208,000)

Long-term note receivable

100,000 @$1.60 160,000 @$1.60 160,000

Total assets H520,000 $832,000 $760,000

Accounts and notes payable

H80,000 @$1.60 $128,000 @$1.60 $128,000

Bonds payable 300,000 @$1.60 480,000 @$1.60 480,000Common shares 140,000 @$1.10 154,000 @$1.10 154,000Cumulative translation gain (loss)

70,000 (2,000)

Total equities H520,000 $832,000 $760,000



b.

I) Accounting exposure:Net amounts translated at current rate =

H 140,000 Dr.net assets

H 100,000 Cr.net liabilities

II) Additional gain or loss from anincrease $35,000 gain $25,000 loss

P9-2(a) (b)

Current rate Temporal method @ $0.82 rates amount

Sales $2,460,000 $0.82 $2,460,000Cost of goods sold:Beginning inventory 164,000 0.74 148,000Purchases 820,000 0.82 820,000

984,000 968,000Ending inventory 328,000 0.85 340,000

656,000 628,000

Depreciation 246,000 0.62 186,000Other operating expenses 738,000 0.82 738,000Interest expense 164,000 0.82 164,000Total expenses 1,804,000 1,716,000Net income (before exchangegains or losses) $ 656,000 $ 744,000

Note: The interest, like all expenses, is translated at the rate in effect when the expense is incurred, rather than when it is paid.

P9-3

a. (I) Functional Currency is the Canadian dollar

Loss on monetary items—bond (to net income):Exchange Translated

Nominal Rates Amounts

Opening €9,000,000 1.20 $10,800,000Closing 9,000,000 1.65 14,850,000

Current year’s loss $ 1,050,000



Translated Financial Statements

Statement of Comprehensive Income Year ended December 31, 20X5

Exchange TranslatedNominal Rates Amounts

Revenue €1,000,000 1.40 $ 1,400,000Expenses:

Interest expense 990,000 1.40 1,386,000Other expense 10,000 1.40 14,000Monetary loss — see above 4,050,000

1,000,000 5,450,000Income (loss) € 0 $(4,050,000)

Statement of Financial PositionDecember 31, 20X5

Cash — —Land €12,000,000 1.20 $14,400,000

$14,400,000

Bond €9,000,000 1.65 $14,850,000Common shares 3,000,000 1.20 3,600,000Retained earnings (deficit) — (4,050,000)

$14,400,000

a. (II) Functional Currency is the Euro

Translation Gain on Net Assets (to other comprehensive income)

Exchange TranslatedNominal Rate Amounts

Net assets, opening €3,000,000 1.20 $3,600,000closing 3,000,000 1.65 4,950,000

Exchange gain $1,350,000



Translated Financial Statements

Statement of Comprehensive IncomeYear ended December 31, 20X5

Exchange TranslatedNominal Rate Amounts

Revenue €1,000,000 1.40 $1,400,000Expenses:

Interest expense 990,000 1.40 1,386,000Other expense 10,000 1.40 14,000

€1,000,000 1,400,000 Income € 0 $ 0

Statement of financial positionDecember 31, 20X5

Cash — Land 12,000,000 1.65 $19,800,000

$19,800,000Bond 9,000,000 1.65 $14,850,000Common shares 3,000,000 1.20 3,600,000Translation gain/loss* see above 1,350,000

$19,800,000

* Reported as a separate component of shareholder’s equity under ASPE, or in Other Comprehensive Income under IFRS.

b. Economic exposure is the impact of changes in the relative values of the currencies on the earnings ability of the foreign subsidiary. The foreign debt is hedged by the foreign non-monetary land investment if Euro proceeds from the sale of the land in five years are adequate to pay off the Euro debt. Therefore, reflecting an exchange loss on the bond (temporal method) does not reflect economic exposure.

The current-rate method better reflects economic exposure. Investco Ltd. is exposed to the extent of its net asset investment (€ 3,000,000 at historic values) and in fact enjoyed favourable unrealized exchange gains on this investment during 20X5, a year during which the Canadian dollar was depreciating relative to the Euro.



c. According to IFRS, the German subsidiary’s functional currency is the Euro because:

• there is no interrelationship between the day-to-day activities of the German subsidiary and the Canadian parent

• the activities of the German subsidiary are financed by debt and rental inflows denominated in the Euro

• the Euro debt will be repaid out of Euro proceeds from the sale of the land in five years.

In effect, there is no exposure of the Canadian parent to short-term fluctuations in the Euro exchange rate and it would be inappropriate to include unrealized foreign exchange gains or losses in the Canadian parent’s income for each of the five years. Therefore, the current-rate method would be required.

P9-4

a. (I) Equipment (₤7,500 × 1.40) $ 10,500 (II) Accumulated amortization

1st purchase (₤3,000/10 × 2 × 1.40) $ 840 2nd purchase (₤4,500/10 × 1.40) 630 Total 1,470

(III) Amortization expense[(₤3,000/10 + ₤4,500/10) × 1.47] $ 1,103

b. (I) Equipment

1st purchase (₤3,000 × 1.55) $ 4,6502nd purchase (₤4,500 × 1.63) 7,335

Total $11,985

(II) Accumulated amortization1st purchase (₤3,000/10 × 2 × 1.55) $ 9302nd purchase (₤4,500/10 × 1.63) 734

Total $ 1,664



P9-5

a.Maple Limited

Statement of Financial PositionDecember 31, 20X9(Canadian dollars)

Cash (US$100,000 × 1.40) $ 140,000Accounts receivable (US$200,000 × 1.40) 280,000Inventory [(US$180,000 × 1.38) + (US$120,000 × 1.35)] 410,400Equipment—net (US$1,100,000 × 1.17) 1,287,000

$2,117,400

Accounts payable (US$250,000 × 1.40) $ 350,000Bonds payable (US$700,000 × 1.40) 980,000Common shares (US$100,000 × 1.17) 117,000Retained earnings (to balance) 670,400

$2,117,400

b. Bonds payable, end of year (US$700,000 × 1.40) $980,000 Bonds payable, beginning of year (US$700,000 × 1.31) 917,000 Exchange loss $ 63,000

c. Items subject to exchange rate exposure (= shareholders’ equity):

US$ Rate C$

Beginning $ 710,000 1.31 $ 930,100Net income 200,000 1.34 268,000Dividends (160,000) 1.36 (217,600)Calculated 980,500 Actual $ 750,000 1.40 1,050,000Exchange gain (credit to cumulative translation adjustment) $ 69,500

d. No, this is not a valid statement. The capital assets are reported at historical cost less accumulated amortization in the US dollar balance sheet. When a historical cost in US dollars is multiplied by a current rate, the resulting amount is not a current value of the capital asset in Canadian dollars. To get a current value in Canadian dollars, the current value in US dollars of the capital assets is multiplied by the current rate.

[CGA]



P9-6a. Translation of Financial Statements by Current-Rate Method, 20X5

Calculation of financial statement translation gain

Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Net assets, January 1, 20X5 195,000 0.94 183,300Add: Net Income 150,000 0.99 148,500Less: Dividends (70,000) 0.98 (68,600)Derived balance 263,200Net assets, December 31, 20X5 275,000 1.02 280,500Translation gain for 20X5 17,300


Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Sales 500,000 0.99 495,000Cost of goods sold 280,000 0.99 277,200Gross profit 220,000 217,800Amortization expense 50,000 0.99 49,500Other expenses 20,000 0.99 19,800Income 150,000 148,50020X5 Translation Gain 17,300

Statement of Financial Position At December 31, 20X5

Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Cash 120,000 1.02 122,400Accounts receivable 85,000 1.02 86,700Inventory 80,000 1.02 81,600Equipment, net 250,000 1.02 255,000

535,000 545,700

Accounts payable 60,000 1.02 61,200Bonds payable 200,000 1.02 204,000Common shares 100,000 0.94 94,000Retained earnings 175,000 Calculated* 169,200

535,000 528,400Cumulative Translation Gain 17,300

*Calculation of retained earnings



Beginning retained earnings, 20X5 95,000 0.94 89,300Add: Net Income 150,000 0.99 148,500Less: Dividends (70,000) 0.98 (68,600)Ending retained earnings, 20X5 175,000 169,200

Calculation of translation gain/loss on FVIsBeginning goodwill [(200 ÷ 0.80) – 195) 55,000 0.94 51,700Impairment during year none -Derived value 51,700Ending goodwill 55,000 1.02 56,100Translation gain 4,400

b. Translation of Financial Statements by Temporal Method, 20X5

Calculation of financial statement translation loss

Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Net monetary liabilities, January 1, 20X5 (165,000) 0.94 (155,100)Add: Sales 500,000 0.99 495,000Less: Purchases (280+80-60) 300,000 0.99 (297,000)Less: Other expenses 20,000 0.99 (19,800)Less: Dividends (70,000) 0.98 (68,600)Derived balance (45,500)Net monetary liabilities, December 31, 20X5

(55,000)1.02

(56,100)

Translation loss for 20X5 (10,600)


Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Sales 500,000 0.99 495,000Beginning inventory 60,000 0.94 56,400Purchases 300,000 0.99 297,000Ending inventory (80,000) 1.00 (80,000)Cost of goods sold 280,000 273,400Gross profit 220,000 221,600Amortization expense 50,000 0.94 47,000Other expenses 20,000 0.99 19,800Income 150,000 154,80020X5 Translation Loss (include in consolidated income)

(10,600)




Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)


535,000 524,100


535,000 534,700Cumulative Translation Loss (include in consolidated R.E.)

(10,600)

*Calculation of retained earningsBeginning retained earnings, 20X5 95,000 0.94 89,300Add: Net Income 150,000 See above 154,800Less: Dividends (70,000) 0.98 (68,600)Ending retained earnings, 20X5 175,000 175,500

P9-7

a. It appears that the functional currency of Soul’s operations is the Swiss Franc, based on the following:

Inventory is purchased from suppliers in Switzerland.

Sales prices are largely immune to changes in exchange rates.

Sales prices are determined largely by local competition.

b. Translation of Financial Statements by Temporal Method, 20X15

Calculation of financial statement translation loss

Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Net monetary liabilities, January 1, 20X15 (95,000) 0.86 (81,700)Add: Sales 850,000 0.91 773,500Less: Purchases (500+110-80) (530,000) 0.91 (482,300)Less: Other expenses (245,000) 0.91 (222,950)



Less: Dividends (30,000) 0.94 (28,200)Derived balance (41,650)Net monetary liabilities, December 31, 20X15

(50,000)0.96

(48,000)

Translation loss for 20X15 (6,350)


Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Sales 850,000 0.91 773,500Beginning inventory 80,000 0.86 68,800Purchases 530,000 0.91 482,300Ending inventory (110,000) 0.95 (104,500)Cost of goods sold 500,000 446,600Gross profit 350,000 326,900Amortization expense 30,000 0.86 25,800Other expenses 245,000 0.91 222,950Income 75,000 78,15020X15 Translation Loss (include in consolidated income)

(6,350)


Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)


580,000 530,700


580,000 537,050Cumulative Translation Loss (include in consolidated R.E.)

(6,350)

*Calculation of retained earningsBeginning retained earnings, 20X15 125,000 0.86 107,500Add: Net Income 75,000 See above 78,150Less: Dividends (30,000) 0.94 (28,200)



Ending retained earnings, 20X15 170,000 157,450

c. Translation of Financial Statements by Current-Rate Method, 20X15

Calculation of financial statement translation gain

Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Net assets, January 1, 20X15 265,000 0.86 227,900Add: Net Income 75,000 0.91 68,250Less: Dividends (30,000) 0.94 (28,200)Derived balance 267,950Net assets, December 31, 20X15 310,000 0.96 297,600Translation gain for 20X15 29,650


Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)

Sales 850,000 0.91 773,500Cost of goods sold 500,000 0.91 455,000Gross profit 350,000 318,500Amortization expense 30,000 0.91 27,300Other expenses 245,000 0.91 222,950Income 75,000 68,25020X15 Translation Gain 29,650


Local Currency

(SF)

Exchange Rate

Translated Amounts

(C$)


580,000 556,800


580,000 527,150



Cumulative Translation Gain 29,650

*Calculation of retained earningsBeginning retained earnings, 20X15 125,000 0.86 107,500Add: Net Income 75,000 0.91 68,250Less: Dividends (30,000) 0.94 (28,200)Ending retained earnings, 20X15 170,000 147,550

Calculation of translation gain/loss on FVIsBeginning goodwill [(300 – 265) 35,000 0.86 30,100Impairment during year none -Derived value 30,100Ending goodwill 35,000 0.96 33,600Translation gain 3,500

[CGA]

P9-8a.

SJC Ltd.Translated Statement of Comprehensive Income

Year ended December 31, 20X6

US$Exchange

Rate C$Sales 5,000,000 1.25 6,250,000

Opening inventory 1,800,000 1.20 2,160,000Purchases 3,500,000 1.25 4,375,000Goods available 5,300,000 6,535,000Closing inventory (2,100,000) 1.28 (2,688,000)Cost of goods sold 3,200,000 3,847,000

2,403,000Amortization expense 350,000 1.20 420,000Bond interest expense 240,000 1.25 300,000Other expenses 470,000 1.25 587,500Foreign exchange loss (1) 167,000Net income 740,000 928,500

Notes:(1) Calculation of Foreign Exchange Loss:

US$Exchange

Rate C$Net monetary position, December 31, 20X5 (2,050,000) (2) 1.20

(2,460,000)



Changes during 20X6 Sales 5,000,000 1.25 6,250,000 Purchases (3,500,000) 1.25 (4,375,000) Bond interest expense (240,000) 1.25 (300,000) Other expenses (470,000) 1.25 (587,500) Dividends (50,000) 1.27 (63,500) Plant and equipment (600,000) 1.30 (780,000) Net changes 140,000 144,000Calculated net monetary position, December 31, 20X6 (2,316,000)Actual net monetary position, December 31, 20X6 (1,910,000) (3) 1.30 (2,483,000)Foreign exchange loss, 20X6 (167,000)

(2) $250,000 + $1,100,000 – $400,000 – $3,000,000 = $(2,050,000)

(3) $300,000 + $1,350,000 – $560,000 – $3,000,000 = $(1,910,000)

b.(I) Accounts receivable $1,350,000 × $1.30 = $1,755,000

(II) Plant and equipment (net)US$ (3,000,000 – 250,000 – 100,000) (1.20) + US$600,000 (1.30) =

C$3,960,000

(III) Bonds payable US$3,000,000 × 1.30 = C$3,900,000

c.(I) Plant and equipment US$3,250,000 × 1.30 = $4,225,000

(II) Common shares US$1,500,000 × 1.20 = $1,800,000

(III) Retained earnings Opening retained earnings (US$1,250,000 × 1.20) = $1,500,000 Net income (US$740,000 × 1.25) = 925,000 Dividends (US$(50,000) × 1.27) = (63,500) $2,361,500

d.



Calculation of translation gain on FVIs Local Currency

(US $)

Exchange Rate

Translated Amounts

(C$)

FVIs, January 1, 20X6 [(5,000÷0.8) – 2,750] 3,500,000 1.20 4,200,000Less: Amortization on patents (1,000 ÷ 5yrs) 200,000 1.25 (250,000)Derived balance 3,950,000FVIs, December 31, 20X6 3,300,000 1.30 4,290,000Translation gain for 20X6 340,000

e. Questions that could be asked about the operation of SJC to help establish its functional currency include:

1. What is the currency that influences the selling prices for its goods and services? (IFRS note that this will often be the currency in which prices are denominated and settled.)

2. What is the currency of the country whose competitive forces and regulations determine the selling prices for its goods and services?

3. What is the currency that influences its costs of providing goods and services? (IFRS note that this will often be the currency in which these costs are denominated and settled.)

[CGA]

P9-9

a.

Port should translate SuperSpan’s financial statements into Canadian dollars using the temporal method. Two facts that support this conclusion are:• SuperSpan makes its sales based on prices determined by the worldwide market.• SuperSpan imports a significant amount of wood from Canadian timber firms.

b. Current-rate Method Calculation of translation loss Local Currency

(€)Exchange

rateTranslated

amounts (C $)

Net Assets Jan 1, 20X7 700,000 1.45 1,015,000 Add: Net Income for 20X7 120,000 1.42 170,400 Less: Dividends for 20X7 (40,000) 1.41 (56,400)Add: Additional shares issued in 20X7 400,000 1.44 576,000



Derived balance 1,705,000 Actual balance 1,180,000 1.40 1,652,000 Translation loss for 20X7 53,000


Sales 2,100,000 1.42 2,982,000 Cost of goods sold 1,600,000 1.42 2,272,000 Gross Profit 500,000 710,000 Selling and administrative 145,000 1.42 205,900 Bond interest expense 30,000 1.42 42,600 Amortization 125,000 1.42 177,500 Income before income taxes 200,000 284,000 Income taxes 80,000 1.42 113,600 Net income in 20X7 120,000 170,400 Translation loss for 20X7(include in consolidated OCI) (53,000)


Cash 300,000 1.40 420,000 Accounts receivable 350,000 1.40 490,000 Inventory 500,000 1.40 700,000 Equipment, net 575,000 1.40 805,000 1,725,000 2,415,000 Accounts payable 145,000 1.40 203,000 Bonds payable 400,000 1.40 560,000 Common shares (1) 900,000 1,336,000 Cumulative OCI (2) (99,000)Retained earnings (3) 280,000 415,000 1,725,000 2,415,000

(1) Common sharesOriginal shares 500,000 1.52 760,000Shares issued in 20X7 400,000 1.44 576,000

1,336,000

(2) Calculation of cumulative translation lossNet Assets Jan 1, 20X6 (700 – 150) 550,000 1.52 836,000 Add: Net Income for 20X6 150,000 1.50 225,000 Less: Dividends for 20X6 0 0



Derived balance 1,061,000 Actual balance 700,000 1.45 1,015,000 Translation loss for 20X6 (46,000) Translation loss for 20X7 above (53,000)Cumulative translation loss (99,000)

(3) Retained earningsRetained earnings January 1, 20X6 (200 – 150) 50,000 1.52 76,000Add: Net income 20X6 150,000 1.50 225,000Retained earnings December 31, 20X6 200,000 301,000Add: Net income 20X7 120,000 1.42 170,400Less: Dividends 20X7 (40,000) 1.41 (56,400)Retained earnings December 31, 20X7 280,000 415,000

c. Temporal Method

Calculation of translation loss Local Currency (€)

Exchange rate

Translated amounts (C $)

Monetary Items: Balance January 1, 20X7 (250+325-200-400) (25,000) 1.45 (36,250)Changes during 20X7: Sales revenue 2,100,000 1.42 2,982,000 Inventory purchases (1,600+500-425) (1,675,000) 1.42 (2,378,500) Selling and administrative (145,000) 1.42 (205,900) Bond interest expense (30,000) 1.42 (42,600) Income tax expense (80,000) 1.42 (113,600) Dividends paid (40,000) 1.41 (56,400) Issue of common shares 400,000 1.44 576,000 Purchase of equipment (400,000) 1.44 (576,000)Derived balance 148,750 Balance Dec 31, 20X7(300+350-145-400) 105,000 1.40 147,000 Net translation loss for 20X7 1,750

Statement of Comprehensive Income



Year ended December 31, 20X7

Sales 2,100,000 1.42 2,982,000 Cost of goods sold (1) 1,600,000 2,292,500 Gross Profit 500,000 689,500 Selling and administrative 145,000 1.42 205,900 Bond interest expense 30,000 1.42 42,600 Amortization (2) 125,000 188,000 Income before income taxes 200,000 253,000 Income taxes 80,000 1.42 113,600 Translation loss for 20X7 (1,750)Net income in 20X7 120,000 137,650


Cash 300,000 1.40 420,000 Accounts receivable 350,000 1.40 490,000 Inventory 500,000 1.43 715,000 Equipment, net (3) 575,000 844,000 1,725,000 2,469,000 Accounts payable 145,000 1.40 203,000 Bonds payable 400,000 1.40 560,000 Common shares (4) 900,000 1,336,000 Retained earnings (5) (includes translation losses) 280,000 370,000 1,725,000 2,469,000

(1) Cost of goods sold Opening inventory 425,000 1.48 629,000 Purchases 1,675,000 1.42 2,378,500 Closing inventory 500,000 1.43 715,000 Cost of goods sold 3,200,000 2,292,500

(2) Amortization expense Acquired 20X1 100,000 1.52 152,000 Acquired 20X7 25,000 1.44 36,000

188,000(3) Equipment net, calculation New equipment [400 – (400 ÷ 8 × .5)] 375,000 1.44 540,000 Old equipment (575 – 375) 200,000 1.52 304,000 844,000

(4) Common shares



Original shares 500,000 1.52 760,000Shares issued in 20X7 400,000 1.44 576,000

1,336,000

(5) Retained earningsRetained earnings January 1, 20X6 (200 – 150) 50,000 1.52 76,000Add: Net income 20X6 (plug to balance) 150,000 (plug) 212,750Retained earnings December 31, 20X6 200,000 288,750Add: Net income 20X7 120,000 Above 137,650Less: Dividends 20X7 (40,000) 1.41 (56,400)Retained earnings December 31, 20X7 280,000 370,000

[CGA]

P9-10

a.Calculation of net exchange gain / loss for 20X2—Temporal method

P Rate CDN$Net monetary items:

Opening balance 5,000,000 0.10 $ 500,000Revenues 3,200,000 0.12 384,000Operating expenses (2,200,000) 0.12 (264,000)Capital assets (4,900,000) 0.11 (539,000)Dividends (200,000) 0.13 (26,000)

Derived balance 55,000Actual balance, December 31, 20X2 900,000 0.14 126,000Net exchange gain for 20X2 $ 71,000

Calculation of cumulative exchange gain—current-rate method

Analysis of change in net assets:

p 5,000,000 January 2, 20X2 (0.14-0.10) $ 200,000 700,000 Net income (0.14-0.12) 14,000

(200,000) Dividends (0.14-0.13) (2,000)p 5,500,000 Cumulative exchange gain $ 212,000

An alternative calculation is as follows:P Rate CDN$

Net assets:Opening balance 5,000,000 0.10 $ 500,000Add: Net income 700,000 0.12 84,000Less: Dividends (200,000) 0.13 (26,000)

Derived balance 558,000



Actual balance, December 31, 20X2 5,500,000 0.14 770,000Cumulative exchange gain for 20X2 $ 212,000

b.

GC CompanyStatement of Comprehensive Income

Year Ended December 31, 20X2

(i) (ii)(f.c. = peso) (f.c. =

Cdn $)Current-rate Temporal

(Dr) Cr: P Rate CDN $ Rate CDN $

Revenues 3,200,000 0.12 384,000 0.12 384,000Amortization expense (300,000) 0.12 (36,000) 0.11 (33,000)Operating expenses (2,200,000) 0.12 (264,000) 0.12 (264,000)Exchange gain (loss) (note 1) 71,000Total expenses (2,500,000 ) (300,000) (226,000)Net income 700,000 84,000 158,000

Note 1: Gain on monetary items—see above

GC CompanyStatement of Financial Position

December 31, 20X2

(f.c. = peso) (f.c. = C$)Current-rate Temporal

(Dr.) Cr. P Rate C$ Rate C$

Current monetary items 2,800,000 0.14 392,000 0.14 392,000Capital assets 4,900,000 0.14 686,000 0.11 539,000Accumulated amortization (300,000 ) 0.14 (42,000 ) 0.11 (33,000 ) Total assets 7,400,000 1,036,000 898,000

(Dr.) Cr.Current monetary liabilities 900,000 0.14 126,000 0.14 126,000Long-term debt 1,000,000 0.14 140,000 0.14 140,000Common shares 5,000,000 0.10 500,000 0.10 500,000



Retained earnings 700,000 0.12 84,000 — 158,000Less: dividends (200,000) 0.13 (26,000) 0.13 (26,000)OCI-Cumulative exchange gain 212,000 —Total equities 7,400,000 1,036,000 898,000

[CGA]

P9-11

20X7 20X6Accounts receivable—translated at the

current rate at each year-end:42,200 LCU/1.6 $26,37537,000 LCU/1.8 $20,556

Less allowance for uncollectible accounts:2,200 LCU/1.6 (1,375)2,000 LCU/1.8 (1,111)

$25,000 $19,445

Inventories—translated at date of purchase:80,000 LCU/1.8 (June 20X7) $44,44475,000 LCU/2.1 (June 20X6) $35,714

Capital assets— translated at date of purchase:24,000 LCU/2.1 (January 1, 20X6) $11,429 $11,429140,000 LCU/2.1 (January 1, 20X6) 66,667 66,66730,000 LCU/1.6 (July 1, 20X7) 18,750 —

96,846 78,096

Less accumulated depreciation:14,000 LCU/2.1 (for 20X6) (6,667) (6,667)14,000 LCU/2.1 (for 20X7) (6,667) 3,000 LCU/1.6 (for 20X7) (1,875) —

$81,637 $71,429

Long-term debt—translated at the current rate:100,000 LCU/1.6 $62,500120,000 LCU/1.8 $66,667

Common shares—translated at historical rate:50,000 LCU/2.1 $23,810 $23,810



P9-12

Note: The statement of comprehensive income is in the solution to P9-2.

a. Statements of financial position, current-rate method:

20X3 20X2

Cash $0.87 $ 174,000 $0.77 $ 385,000Accounts receivable 0.87 348,000 0.77 231,000Inventory 0.87 348,000 0.77 154,000Land 0.87 435,000Equipment (net) 0.87 1,479,000 0.77 1,540,000

$2,784,000 $2,310,000

Accounts payable 0.87 $ 435,000 0.77 $ 308,000Bonds payable 0.87 1,566,000 0.77 1,386,000Common shares 0.52 260,000 0.52 260,000Retained earnings 0.67 201,000 0.67 201,000Retained earnings—20x 47,000**Translation gain 275,000 155,000

$2,784,000 $2,310,000

**Retained earnings—20X3:Net income, 20X3 CF800,000 $0.82 $ 656,000Dividends, 20X3 (700,000) $0.87 (609,000)Increase, 20X3 CF100,000 $ 47,000

b. Statements of financial position, temporal method:

20X3 20X2

Cash $0.87 $ 174,000 $0.77 $ 385,000Accounts receivable 0.87 348,000 0.77 231,000Inventory 0.85 340,000 0.74 148,000Land 0.87 435,000Equipment (net) 0.62 1,054,000 0.62 1,240,000

$2,351,000 $2,004,000

Accounts payable 0.87 $ 435,000 0.77 $ 308,000Bonds payable 0.87 1,566,000 0.77 1,386,000Common shares 0.52 260,000 0.52 260,000Retained earnings 336,000* 0.67 201,000Translation gain (loss) (246,000) (151,000)

$2,351,000 $2,004,000



*Retained earnings:Balance, December 31, 20X2 CF300,000 $0.67 $ 201,000Net income, 20X3 800,000 P9-2 744,000Dividends, 20X3 (700,000) $0.87 (609,000)Balance, December 31, 20X3 CF400,000 $ 336,000

c. Translation gain or loss, 20X3:

(1) Current-rate method: Shareholders’ equity: Beginning balance = CF800,000 ($0.87 – $0.77) = $ 80,000 gainNet income = CF800,000 ($0.87 – $0.82) = 40,000 gain

$120,000 gain (Alternative calculation)Current-rate method: CF × $

Net assets, January 1, 20X3 $800,000 0.77 $616,000Changes during the year Net Income 800,000 0.82 656,000

Dividends (700,000) 0.87 (609,000)Expected balance, December 31 663,000Actual net assets, December 31 (900,000) 0.87 783,000Exchange gain $120,000

Proof:

Cumulative Translation Gain December 31 20X2 $155,000Add: Translation Gain for 20X3 120,000Cumulative Translation Gain December 31 20X3 275,000

(2) Temporal methodCF × $

Net monetary items, January 1, 20X3 (1,400,000) 0.77 $(1,078,000)Changes during the year Sales 3,000,000 0.82 2,460,000 Purchases (1,000,000) 0.82 (820,000) Other operating expenses (900,000) 0.82 (738,000) Interest expense (200,000) 0.82 (164,000) Purchase of land (500,000) 0.87 (435,000) Dividends (700,000) 0.87 (609,000)



(306,000)Expected balance, December 31 (1,384,000)Actual net monetary items, December 31 (1,700,000) 0.87 (1,479,000)Exchange loss $ 95,000

Proof:

Cumulative Translation Loss December 21 20X2 $(151,000)Add: Translation Loss for 20X3 ( 95,000)Cumulative Translation loss December 31 20X3 (246,000)

P9-13

a. SEQEA would be translated using the current-rate method because the materials and labour for the manufacturing operations are obtained from local sources and the plant was financed with a loan from a Swedish bank.

b. Current-rate method

AccountLocal

Currency (SEK) Exchange rate

Translated amounts (C $)

(I) Other expenses 3,850,000 0.18 693,000

(II) Inventory 200,000 0.15 30,000

(III) Common shares 100,000 0.24 24,000

(IV) Financial Statement Translation gain or loss for 20X15:Net Assets:

Balance January 1, 20X15 (1) 1,530,000 0.20 306,000Changes during 20X15Net income 500,000 0.18 90,000Dividends paid (2) (325,000) 0.15 (48,750)

Derived balance 347,250Actual balance (3) 1,705,000 0.15 255,750 Net translation loss for 20X15 91,500

FVI Translation Loss for 20X15 Goodwill January 1 20X15 1,000,000 0.20 200,000 No Changes During Year ___ _____ Derived Balance 200,000



Goodwill December 31 20X15 1,000,000 0.15 150,000 Net Translation Loss for 20X15 50,000 Total Translation Loss for 20X15 (91,500 + 50,000) 141,500

Notes:

1: 1,430,000 + 100,000 = 1,530,000

2: 1,430,000 + 500,000 – 1,605,000 = 325,000

3: 1,605,000 + 100,000 = 1,705,000

c. Temporal method

Account (SEK) Exchange rate C $(I) Cost of goods sold

Beginning inventory 180,000 0.21 37,800 Purchases 4,020,000 0.18 723,600 Ending Inventory (200,000) 0.16 (32,000)

4,000,000 729,400

(II) Amortization expense New plant 5,000 0.20 1,000 Other assets 145,000 0.24 34,800

150,000 35,800

(III) Monetary assets 2,400,000 0.15 360,000

(IV) Non-monetary liabilities 195,000 0.17 33,150

(V) Translation gain or loss for 20X15:

Monetary Items:

Balance January 1, 20X15 (1) (330,000) 0.20 (66,000) Changes during 20X15:

Sales revenue (2) 8,525,000 0.18 1,534,500Inventory purchases (4,020,000) 0.18 (723,600)Other expense (3,850,000) 0.18 (693,000)Dividends paid (325,000) 0.15 (48,750)

Derived balance 3,150 Actual balance (3) 0 0.15 0Net translation loss for 20X15 3,150

Notes:

1: 2,170,000 – 2,500,000 = (330,000)



2: Sales revenue + change in deferred revenue (non-monetary liability) = 8,500,000 + [195,000 – 170,000] = 8,525,000

3: 2,400,000 – 2,400,000 = 0

4: There is no translation gain or loss on the goodwill FVI because it continues to be translated at the historical rate.


Business

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