IAS 21, the effects of changes in foreign exchange rates

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. Which of the following factors would not be used in determining the functional currency of the entity?

  2. Where a foreign entity functions independently from the parent, the functional currency of the foreign entity will be -

  3. An entity uses the Dollar as its functional currency. The entity has grown and exports to Europe and conducts business through a branch. For the two years to 31 December 2008, 90 per cent of the business was conducted using the Euro as the business currency. The functional currency should at 31 December 2008 -

  4. An entity started trading in the USA. After several years the entity expanded trading in Europe through a subsidiary. The subsidiary is essentially an extension of their own business and the directors of the two entities are the same. The functional currency of the subsidiary is -

  5. An entity, whose functional currency is the dollar, purchases machinery from a foreign supplier for 8 million Euros on 31 October 2008 when the exchange rate was 1.5 Euros = 1 dollar. At the year-end of 31 December 2008, the amount has not been paid. The closing exchange rate was 1.25 Euros = 1 dollar. Which of the following statements are correct?

  6. An entity, whose functional currency is the dollar, acquired 100% of the equity capital of a foreign entity at a consideration of 19 million Euros on 30 June 2008.The fair value of the net assets of the foreign entity at that date was 16 million Euros. The exchange rates at 30 June 2008 and 31 December 2008 were 1.2 Euros = 1 dollar and 1.4 Euros = 1 dollar respectively. What figure for goodwill should be included in the group financial statements for the year ended 31 December 2008 if goodwill is not impaired?

  7. An entity has a subsidiary which operates in a country where the exchange rates are volatile and there are wild seasonal variations in costs and revenue. Which rates of exchange may best be used to translate the foreign subsidiary statement of comprehensive income?

  8. An entity, whose functional currency is the Dollar, has a foreign subsidiary. The subsidiary sold goods to the parent for 42 million Euros when the exchange rate was 2 Euros = 1 Dollar .The cost of the goods to the subsidiary was 24 million Euros. The goods were unsold at the year end of 31 December 2008 when the exchange rate was 1.5 Euros = 1 Dollar. What is the value of the intra group profit which will be eliminated at 31 December 2008?

  9. An entity, whose functional currency is the Dollar, has a foreign subsidiary. The subsidiary declared a dividend to the parent of 9 million Euros which was recorded in the parent financial statements. The exchange rate at that date was 1.5 Euros = 1 Dollar. At the date of receipt of the dividend, the exchange rate had moved to 1.6 Euros = 1 Dollar. The exchange difference arising on the dividend would be treated as follows in the financial statements

  10. An entity has a foreign subsidiary whose carrying value at cost is $35 million. It sells the subsidiary on 31 December 2008 for 52 million Euro. As at 31 December 2008, the credit balance on the exchange reserve which relates to this subsidiary was $8 million. The functional currency of the entity is the dollar and the exchange rate on 31 December 2008 is $1 = 1.3 Euro. The net asset value of the subsidiary at the date of disposal was $34 million. What is the profit or loss on the sale of the subsidiary that will appear in the group statement of comprehensive income?