Advanced Financial
Accounting
An IFRS® Standards Approach, 4e
Pearl Tan, Chu Yeong Lim and Ee Wen Kuah
Solutions Manual
Chapter 8
Accounting for the Effects of Changes
in Foreign
Exchange Rates
Copyright © 2019 by McGraw-Hill Education (Asia)
,Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 8 solutions
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 real exchange rate between two currencies.
Operating exposure affects a firm’s competitive position through its impact on a
firm’s revenue and costs. Operating 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 parent’s 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 be an extension of the parent company’s
operation. Transactions of the foreign 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 parent’s 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 income statement as they are considered to be
‘transaction exchange’ differences.
6 A change in the functional currency is accounted for prospectively.
2
2019 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
, Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 8 solutions
7 Yes. Goodwill is considered an asset of the foreign operation and is translated using
the closing rate under the Closing Rate method.
8 Answer is (c). The functional currency of the subsidiary in England is a third
currency. This requires the financial statements prepared in British pounds to be
remeasured into the functional currency, the US dollar, and then translated using
the closing rate method into the presentation currency.
EXERCISES
Exercise 8.1
Answer is (b).
FC000 Rate $000
Revenue 1,000 0.6 600
Depreciation expense (200) 0.5 (100)
Remeasurement gain* ____ 100
Net profit 800 $600
Remeasurement gain:
FC000 Rate $000
Opening net monetary asset 2,000 0.5 1,000
Revenue 1,000 0.6 600
Purchase of cars (2,000) 0.5 (1,000)
600 (A)
Net monetary asset c/f 1,000 0.7 700 (B)
Remeasurement gain (B – A) 100
Exercise 8.2
Answer is (c).
FC000 Rate $000
Opening net assets 2,000 0.5 1,000
Net profit for year 800 0.6 480
_____ $1,480 (A)
Net assets c/f 2,800 0.7 $1,960 (B)
Translation gain (B – A) 480
Exercise 8.3
Answer is (c).
FC
Net monetary liabilities @ 1.1.20x1 (100,000)
Sales 500,000
Unearned revenue 60,000
Expenses (350,000)
Issue of new shares 1,000,000
Net monetary assets @ 31.12.20x1 1,110,000
3
2019 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
, Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 8 solutions
Exercise 8.4
Answer is (b).
FC Rate $
Net monetary liabilities, 1.1.20x1 (100,000) 0.6 (60,000)
Sales less expenses 150,000 0.55 82,500
Unearned revenue received 60,000 0.48 28,800
Issue of new shares 1,000,000 0.5 500,000
551,300 (A)
Net assets @ 31.12.20x1 1,110,000 0.5 555,000 (B)
Re-measurement gain (B – A) 3,700
Exercise 8.5
Fair value of net assets:
Fair value FC1,430,000
Less deferred tax on fair value differential (10,000)
Fair value of adjusted net assets FC1,420,000
30% = FC 426,000
Cost of investment in FC (396,000/0.88) = FC 450,000
Goodwill in FC = FC 24,000
Goodwill in $ = $21,120
(1) Foreign currency translation reserves attributable to investment in Sanchoz at 31
December 20x2 is -$18,450 (debit balance) obtained as follows:
Translation difference on fair value of net assets
FC Exch. Rate $
Net assets at 31.12.20x1 1,420,000 0.88 1,249,600
Net profit for 20x2 150,000 0.85 127,500
1,377,100
Net assets at 31.12.20x2 1,570,000 0.84 1,318,800
Translation loss (58,300)
30% share (17,490)
Translation difference on goodwill
FC Exch. Rate $
Goodwill at 31.12.20x1 24,000 0.88 21,210
Goodwill at 31.12.20x2 24,000 0.84 20,160
Translation loss on goodwill (960)
FCTR at 31 December 20x2 = ($17,490) + ($960) = ($18,450)
4
2019 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
Accounting
An IFRS® Standards Approach, 4e
Pearl Tan, Chu Yeong Lim and Ee Wen Kuah
Solutions Manual
Chapter 8
Accounting for the Effects of Changes
in Foreign
Exchange Rates
Copyright © 2019 by McGraw-Hill Education (Asia)
,Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 8 solutions
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 real exchange rate between two currencies.
Operating exposure affects a firm’s competitive position through its impact on a
firm’s revenue and costs. Operating 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 parent’s 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 be an extension of the parent company’s
operation. Transactions of the foreign 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 parent’s 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 income statement as they are considered to be
‘transaction exchange’ differences.
6 A change in the functional currency is accounted for prospectively.
2
2019 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
, Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 8 solutions
7 Yes. Goodwill is considered an asset of the foreign operation and is translated using
the closing rate under the Closing Rate method.
8 Answer is (c). The functional currency of the subsidiary in England is a third
currency. This requires the financial statements prepared in British pounds to be
remeasured into the functional currency, the US dollar, and then translated using
the closing rate method into the presentation currency.
EXERCISES
Exercise 8.1
Answer is (b).
FC000 Rate $000
Revenue 1,000 0.6 600
Depreciation expense (200) 0.5 (100)
Remeasurement gain* ____ 100
Net profit 800 $600
Remeasurement gain:
FC000 Rate $000
Opening net monetary asset 2,000 0.5 1,000
Revenue 1,000 0.6 600
Purchase of cars (2,000) 0.5 (1,000)
600 (A)
Net monetary asset c/f 1,000 0.7 700 (B)
Remeasurement gain (B – A) 100
Exercise 8.2
Answer is (c).
FC000 Rate $000
Opening net assets 2,000 0.5 1,000
Net profit for year 800 0.6 480
_____ $1,480 (A)
Net assets c/f 2,800 0.7 $1,960 (B)
Translation gain (B – A) 480
Exercise 8.3
Answer is (c).
FC
Net monetary liabilities @ 1.1.20x1 (100,000)
Sales 500,000
Unearned revenue 60,000
Expenses (350,000)
Issue of new shares 1,000,000
Net monetary assets @ 31.12.20x1 1,110,000
3
2019 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
, Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 8 solutions
Exercise 8.4
Answer is (b).
FC Rate $
Net monetary liabilities, 1.1.20x1 (100,000) 0.6 (60,000)
Sales less expenses 150,000 0.55 82,500
Unearned revenue received 60,000 0.48 28,800
Issue of new shares 1,000,000 0.5 500,000
551,300 (A)
Net assets @ 31.12.20x1 1,110,000 0.5 555,000 (B)
Re-measurement gain (B – A) 3,700
Exercise 8.5
Fair value of net assets:
Fair value FC1,430,000
Less deferred tax on fair value differential (10,000)
Fair value of adjusted net assets FC1,420,000
30% = FC 426,000
Cost of investment in FC (396,000/0.88) = FC 450,000
Goodwill in FC = FC 24,000
Goodwill in $ = $21,120
(1) Foreign currency translation reserves attributable to investment in Sanchoz at 31
December 20x2 is -$18,450 (debit balance) obtained as follows:
Translation difference on fair value of net assets
FC Exch. Rate $
Net assets at 31.12.20x1 1,420,000 0.88 1,249,600
Net profit for 20x2 150,000 0.85 127,500
1,377,100
Net assets at 31.12.20x2 1,570,000 0.84 1,318,800
Translation loss (58,300)
30% share (17,490)
Translation difference on goodwill
FC Exch. Rate $
Goodwill at 31.12.20x1 24,000 0.88 21,210
Goodwill at 31.12.20x2 24,000 0.84 20,160
Translation loss on goodwill (960)
FCTR at 31 December 20x2 = ($17,490) + ($960) = ($18,450)
4
2019 © All rights reserved, McGraw-Hill Education (Asia)
Strictly For Instructors Use Only
No Further Distribution Or Reproduction Permitted
