For the second installment of this month’s free CPA lessons, we’re showcasing another of Wiley CPAexcel’s recently updated video lectures–this time, it’s an Introduction to Conversion of Foreign Financial Statements. The lecture and lesson features new content from the AICPA that is testable on the FAR section of the CPA Exam starting this month.
Conversion of Foreign Financial Statements
In this lecture, which is the first of four concerning the topic of foreign conversion, Prof. Pam Smith of Northern Illinois University provides an overview of converting a foreign currency to a domestic currency.
There are two methods of conversion for foreign financial statements: 1) Translation and 2) Remeasurement. The key criteria for determining the method of conversion is to determine the entities function currency. This lecture describes both methods of conversion and how to determine which is appropriate.
Get all that? Here’s your chance to prove what you know by answering a few of the sample questions that accompany this lesson in the Wiley CPAexcel CPA Review Course.
Scroll to the end of this blog post for the answers.
1) Which of the following could be the functional currency of a foreign subsidiary?
I. The recording currency of the foreign subsidiary.
II. The reporting currency of the subsidiary’s parent.
III. A currency other than either the recording currency of the foreign subsidiary or the reporting currency of the subsidiary’s parent.
A. I only.
B. II only.
C. I and II, only.
D. I, II, and III.
2) Which one of the following best describes the currency in which the final consolidated financial statements are presented?
A. The local currency.
B. The reporting currency.
C. The functional currency.
D. The temporal currency.
3) Which one of the following would constitute a highly inflationary economy when determining the functional currency of a foreign entity?
A. 20% inflation for each of the past 5 years.
B. 30% inflation for each of the past 3 years.
C. 35% inflation for each of the past 3 years.
D. 20%, 35%, and 40% inflation, respectively, for each of the past 3 years.
T he functional currency of a foreign subsidiary could be the recording currency of the foreign subsidiary, the reporting currency of the subsidiary’s parent, or a currency other than either the recording currency of the subsidiary or the reporting currency of its parent.
The reporting currency is the currency in which the final consolidated financial statements are presented (reported).
For determining a functional currency, a highly inflationary (hyper-inflationary) economy is one that has experienced a cumulative inflation of 100% or more over the past 3 years. Inflation of 35% per year over the past three years is a cumulative 105% and constitutes a highly inflationary economy.