When remeasuring foreign currency financial statements
into the functional currency, which of the following items would
be remeasured using historical exchange rate?
(a) The requirement is to determine which item would
be remeasured using historical exchange rates when foreign currency
financial statements are being remeasured into the functional
currency. When an entity’s books are not maintained in
the functional currency, it is necessary to use historical exchange
rates in the remeasurement process of certain accounts. Among
the accounts listed is inventories carried at cost. Only marketable
equity securities reported at cost would be remeasured using historical
exchange rates. Bonds payable and accrued liabilities
would be remeasured at the current rate.
Park Co.’s wholly owned subsidiary, Schnell Corp., maintains
its accounting records in euros. Because all of Schnell’s
branch offices are in Switzerland, its functional currency is the
Swiss franc. Remeasurement of Schnell’s year 1 financial statements
resulted in a $7,600 gain, and translation of its financial
statements resulted in an $8,100 gain. What amount should Park
report as a foreign exchange gain as net income in its income
statement for the year ended December 31, year 1?
(b) Schnell’s accounting records are kept in euros, and
its functional currency is the Swiss franc. Before Schnell’s financial
statements can be consolidated with Park’s financial statements,
they must be remeasured from euros to Swiss francs, and
then translated from Swiss francs to US dollars. As a result of
these restatements, there is a remeasurement gain of $7,600, and
a credit translation adjustment of $8,100. A remeasurement gain
or loss is included in net income, but a translation adjustment is
not. Therefore, Park would report a foreign exchange gain of
$7,600 in its year 1 income statement.
In preparing consolidated financial statements of a US parent
company with a foreign subsidiary, the foreign subsidiary’s
functional currency is the currency
(d) An entity’s functional currency is the currency of the
primary economic environment in which the entity operates;
normally, that is the currency of the environment in which an
entity primarily generates and expends cash.
For IFRS reporting purposes, currencies are defined as
(b) For IFRS reporting purposes, currencies are defined
as foreign, functional, and presentation currencies.
For IFRS reporting, the functional currency is
(c) For IFRS reporting, the functional currency is the
currency of the primary economic environment in which the
For IFRS reporting, if the functional currency is the same as
the presentation currency, any translation gains or losses are
generally reported as
(a) If the functional currency is the same as the presentation
currency, any translation gain or loss is reported in
current earnings on the income statement. However, there are
several exceptions to this rule. Currency gains or losses on nonmonetary
items for which gains and losses are recorded in other
comprehensive income should also be reported in other comprehensive
Which of the following is not a IFRS requirement regarding
foreign currency translation?
(d) The requirement is to identify the statement that is
incorrect regarding foreign currency translation under IFRS.
Answer (d) is correct because under IFRS, if the functional currency
is not the same as the presentation currency, gains or losses
are charged to other comprehensive income.