Afa 4e sm chap08
,
, CHAPTER 8
CONCEPT QUESTIONS
1 In accounting exposure, items in the financial statements which are exposed to changes
in foreign exchange rates are assets and liabilities which are remeasured or translated at
the closing rate. Accounting exposure stems from transactions denominated in foreign
currencies and from translation of the financial statements of foreign operations.
Accounting exposure measures the effect of a change in the nominal foreign exchange
rate and can be measured quantitatively. Operating exposure is due to a change in the
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exposure cannot be measured or estimated reliably.
2 Transaction exposure arises from contractual obligations and rights as a result of a firm
entering into a foreign currency denominated transaction. Translation exposure arises
when the foreign currency financial statements of an overseas operation are remeasured
or translated into the presentation currency.
3 A functional currency is the currency of the primary economic environment in which a
firm operates. For a stand-alone entity, the designation of a currency as the functional
currency means that all other currencies other than the functional currency are foreign
currencies. For a group entity, the choice of functional currency of a foreign operation,
such as an overseas subsidiary, determines the method of translating the financial
statements of the foreign operation.
4 Under the Closing Rate method, the foreign operation is considered as an autonomous
operation and the interest in the foreign operation is mainly as an investment. As
such, the interest of the parent is in the net assets of the foreign operation and its
financial performance. Assets and liabilities of the foreign operation are translated at
closing rate. Under the remeasurement approach, the foreign operation is considered to
operation is deemed as transactions undertaken by the parent and the assets and
liabilities of the foreign operation are deemed as assets and liabilities of the parent.
Monetary items are remeasured at closing rate and non-monetary item carried at cost
are remeasured at historical exchange rates.
5 Translation differences under the Closing Rate method do not have an impact on the
cash flow or operations and hence are taken to equity. The accumulated amount
in the foreign currency translation reserves are released to profit or loss when the foreign
operation is disposed of. Under remeasurement, remeasurement gains or losses are
taken to the incom
differences.
, 6 A change in the functional currency is accounted for prospectively.
,
, CHAPTER 8
CONCEPT QUESTIONS
1 In accounting exposure, items in the financial statements which are exposed to changes
in foreign exchange rates are assets and liabilities which are remeasured or translated at
the closing rate. Accounting exposure stems from transactions denominated in foreign
currencies and from translation of the financial statements of foreign operations.
Accounting exposure measures the effect of a change in the nominal foreign exchange
rate and can be measured quantitatively. Operating exposure is due to a change in the
ng
exposure cannot be measured or estimated reliably.
2 Transaction exposure arises from contractual obligations and rights as a result of a firm
entering into a foreign currency denominated transaction. Translation exposure arises
when the foreign currency financial statements of an overseas operation are remeasured
or translated into the presentation currency.
3 A functional currency is the currency of the primary economic environment in which a
firm operates. For a stand-alone entity, the designation of a currency as the functional
currency means that all other currencies other than the functional currency are foreign
currencies. For a group entity, the choice of functional currency of a foreign operation,
such as an overseas subsidiary, determines the method of translating the financial
statements of the foreign operation.
4 Under the Closing Rate method, the foreign operation is considered as an autonomous
operation and the interest in the foreign operation is mainly as an investment. As
such, the interest of the parent is in the net assets of the foreign operation and its
financial performance. Assets and liabilities of the foreign operation are translated at
closing rate. Under the remeasurement approach, the foreign operation is considered to
operation is deemed as transactions undertaken by the parent and the assets and
liabilities of the foreign operation are deemed as assets and liabilities of the parent.
Monetary items are remeasured at closing rate and non-monetary item carried at cost
are remeasured at historical exchange rates.
5 Translation differences under the Closing Rate method do not have an impact on the
cash flow or operations and hence are taken to equity. The accumulated amount
in the foreign currency translation reserves are released to profit or loss when the foreign
operation is disposed of. Under remeasurement, remeasurement gains or losses are
taken to the incom
differences.
, 6 A change in the functional currency is accounted for prospectively.
