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=+(b) of the primary economic environment in which the entity operates.(c) in which the financial statements are presented.
=+(d) of the country in which the subsidiary is located.Question 2
=+According to IAS 21 The Effects of Changes in Foreign Exchange Rates the following statement ‘the currency that affects the economic wealth of the entity’ provides a definition of:
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 605(a) functional currency.(b) local currency.(c) presentation currency.(d) foreign currency.
=+Question 3 According to IAS 21 The Effects of Changes in Foreign Exchange Rates the currency in which an entity primarily generates and expends cash is considered to be the:(a) economic
=+Question 4 he Indicators pointing towards the local overseas currency as the functional currency include:(i) Parent's cash flows are directly affected on a current basis.(ii) Cash flows are
=+Question 5 When translating the revenue and expenses in the income statement, theoretically each item of revenue and expense should be translated using the spot exchange rate between the:(a)
=+(c) functional currency and the foreign currency on the date the transaction occurred.
=+(d) presentation currency and the local currency on the transaction date.606 INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING
=+Question 6 By applying the definition provided in IAS 21 The Effects of Changes in Foreign Exchange Rates the following items will be regarded as a monetary item:(a) Property, plant and
=+Question 7 The general rule for translating liabilities denominated in a foreign currency into the functional currency is to:(a) translate all liabilities using the current rate existing at balance
=+Question 1 MANCO Limited has entered into the following transactions involving foreign currencies during the year ended 31 March 20X9.
=+1. A 20 year loan of US$ 1,000,000 was obtained from an American bank on 1 August 20X8.The proceeds of the loan were remitted when the exchange rate was US$1.75 = €1.
=+2. A special machine was purchased from a South American supplier, FRTZ, on 1 October 20X8 for DM55,000 when the exchange rate was DM3.15 = €1. This machine is estimated to have an effective
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 607
=+3. Goods for resale were purchased from a Brazilian supplier, ETIEN, on 12 February 1989, for BFr600,000 when the exchange rate was BFr68.00 = €1. This amount was still unpaid at 31 March 20X9.
=+The accountant at MANCO Limited, who has never before had to deal with transactions involving foreign currencies, kept the above notes but has made no entries whatsoever in the books in respect of
=+(a) Prepare journal entries (including cash) to show the accountant of MANCO Limited how each of the transactions (1) to (3) above, in respect of the year ended 31 March 20X9, should be entered
=+(b) Show how each of the transactions (1) to (3) above would be included in the accounts of MANCO Limited for the year ended 31 March 20X9 by preparing appropriate extracts from the accounts for
=+Question 2 You are given the following information in relation to Quickbuck Limited:1. Quickbuck Limited is a US subsidiary of an Irish company, Prosperous Limited.
=+2. You are informed that the rates of exchange between the US dollar and the Euro were as follows:Through 20X3 and on 31 December 20X3 $3 to €1 31 December 20X4 $5 to €1 Average in 20X4 $4 to
=+3. Property, plant and equipment of Quickbuck Limited were bought in Ireland, shipped to and erected for Quickbuck Limited at a cost of €120,000.The net book amount of property, plant and
=+608 INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING
=+4. All of the shares in Quickbuck Limited were acquired by Prosperous Limited when Quickbuck Limited was formed for €25,000.
=+5. When the dividends were paid from Quickbuck Limited to Prosperous Limited the rate of exchange was $4 to €1.
=+6. The statement of comprehensive income of Quickbuck Limited for the year ended 31 December 20X4 was as follows:\ $ $Revenue 544,275 Opening Inventory 41,000 Purchases 1522)Closing Inventory
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 609 Equity and liabilities Equity Ordinary Share Capital 75,000 Revenue Reserves 70,450 145,450 Non-current liabilities:Loan
=+(a) Quickbuck Limited has a different functional currency than Prosperous Limited;
=+(b) Quickbuck Limited has the same functional currency as Prosperous Limited.
=+Question 3 Ray International Limited is a manufacturing company, with a wholly owned subsidiary M Distribution BV operating in the Netherlands. The draft financial statements of the parent company
=+Statement of Comprehensive Income for the Year Ended 31 December 1990 M RAY Distribution International BV Limited DFL000 €'000 Revenue 12,600 10,871 Profit before taxation 1,750 2,600 Income tax
=+1. M Distribution BV was incorporated and commenced trading on 1 January 1990. All property, plant and equipment was purchased on that date.
=+2. The relevant Dutch Guilder exchange rates are as follows:(a) 1 January 1990 3.0 DFL to €1(b) 31 December 1990 4.0 DFL to €1(c) Average for year 3.5 DFL to €1
=+3. The profit before taxation figure of the parent company includes dividend income from the subsidiary of €125,000.
=+4, The current assets of the parent company include a balance due from the subsidiary in respect of sales invoiced to the subsidiary in €s, of €382,000. The corresponding liability in the books
=+5. The revenue figure of the parent company includes sales to the subsidiary of €2,450,000.There are no inter-company profits in inventory.Requirement You are required to prepare the consolidated
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 611 functional currency of M Distribution BV is different from the functional currency of Ray International Limited.Question 4
=+BELVOIR plc (BELVOIR) purchased 35,000 ordinary shares in an Australian company, PERTH Limited (PERTH), on the 30 April 2003. For the purposes of measuring noncontrolling interests at the date of
=+1. Included in the current liabilities of PERTH is A$75,000 in respect of proposed dividends. These were approved by the shareholders in March 2004
=+2. BELVOIR accounts for dividends when received.
=+3. The summarised statements of comprehensive income of BELVOIR and PERTH for the year ended 31 December 2003 are as follows: \12 months to 31 December 2003 BELVOIR PERTH€000 A$’000 Profit
=+Question 5 (Based on ICAI, P3 Summer 2004, Question 5)On 1 January 2000, SHINE Limited (SHINE) acquired 75% of the ordinary share capital of WISDOM Limited (WISDOM), an American company, for
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 613 Gross profit 222,000 9,400 Operating expenses (122,000) 6,510 Operating profit 100,000 2,890 Exceptional Item:- Profit on
=+Ls Prior to 31 December 2003, SHINE owned a number of properties from which the company traded. On this date, SHINE sold one of the properties to BRICK Limited(BRICK) for €20,000,000. Fhe
=+Requirement Prepare the consolidated statement of comprehensive income for the SHINE Group for the year ended 31 December 2003.
=+614 INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING Challenging Questions Question 1 (Based on ICAI, P3 Summer 1997, Question 4)The year end of STUNT Limited (STUNT) is 31 December. é(a) On 1
=+(i) show the value at which the invoice should be recorded in trade payables and inventory on 1 December 2003; ,
=+(ii) show the value at which the invoice should be recorded in trade payables and inventory on the 31 December 2003;
=+(iii) show the settlement value of the invoice;
=+(iv) show the accounting treatment for any exchange gain or loss arising.
=+(b) On 1 December 2003, STUNT sold finished goods to a Swiss company for €600,000 when the exchange rate ruling was €1 = Sf10.8. No cash was received from the Swiss company until 31 January
=+(c) Draft a suitable foreign currencies accounting policy note for STUNT Limited.
=+Question 2 (Based on ICAL, P3 Summer 1996, Question 4)On 1 January 1986 HOME Limited purchased 80% of the shares of AWAY Limited, a company incorporated and operating in Maru, a country whose
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 615 The statements of financial position of HOME Limited and AWAY Limited at 31 December 1995 are as follows:HOME Limited
=+1. The financial statements for the year ended 31 December 1995 included the following:HOME AWAY€ 000 M$’000 Operating profit 370 J)Dividend received from AWAY Limited 9 i Taxation charge (160)
=+2. The following exchange rates have been ascertained:1 January 1986 M$10 = €1 31 December 1994 M$6=€1 31 December 1995 M$5=€1 Average rate for the year ended 31 December 1995 M$5.5 = €1
=+3. The functional currency of Away Limited is the M$ while the functional currency of Home Limited is the Euro.
=+4. Consolidated reserves at 31 December 1994 amounted to €441,000.Requirement Prepare the consolidated statement of financial position of HOME Limited as at 31 December 1995, and a statement of
=+Question 3 (Based on ICAI, P3 Autumn 2000, Question 5)The statements of comprehensive income of TOWER Limited, KITE Limited and LINE Inc. for the year ended 31 December 2003 are shown below.TOWER
=+1. TOWER Limited purchased a 75% interest in KITE Limited on 1 January 1994 for€173 million. There was no difference between the book values and fair values of the net assets of KITE Limited at 1
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 617
=+2. LINE Ine. is situated in a foreign country and was incorporated on 1 January 2003. The company is wholly owned by TOWER Limited and acts as a foreign selling agent for TOWER Limited. There were
=+3. The currency of the foreign country is the Kid (Kd), and the exchange rates ruling during 2003 between the Pound and the Kid were as follows:1 January 2003 Kd3:€1 31 December 2003 Kd6:€1 1
=+4. KITE Limited purchases raw materials from TOWER Limited. During the year ended 31 December 2003, purchases of these raw materials by KITE Limited from TOWER Limited amounted to €100 million.
=+5. It is group policy to set all of any provision for inventory profit on intra-group sales against group reserves.Requirement Prepare the consolidated statement of comprehensive income of TOWER
=+Question 4 Based on ICAI, P3 Summer 1999, Question 3)SUGAR plc purchased 22.5 million shares in CUBE inc. on 1 January 1995, when the retained profits of CUBE inc. were $10 million. The fair value
=+SUGAR plc and its American subsidiary, CUBE inc., sell both bottled mineral water and confectionery products in the UK and US markets respectively. There are no intercompany or inter-segment sales,
=+The statements of comprehensive income for the year ended 31 December 2003 of SUGAR ple and CUBE inc., and their statements of financial position as at that date are shown below:
=+618 INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING Statement of Comprehensive Income for the Year Ended 31 December 2003 SUGAR ple CUBE inc.€000 €’000 $000 $000 Revenue 160,000 — £21000
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 619 EQUITY AND LIABILITIES Capital and Reserves Called up share capital 35,000 30,000 (€1/$1 shares)Retained earnings
=+1. Exchange rates at the relevant dates are as follows:Date $tothe€ Date $ to the€1 January 1995 2 31 December 2002 1.6 Date on which CUBE acquired: 31 December 2003 1.5— non-current assets
=+2. Amounts shown as non-current liabilities by SUGAR plc and CUBE inc. represent the long-term element of the bank loan shown in current liabilities. These loans were raised by each of the
=+Question 5 Based on ICAI, P3 Summer 2001, Question 4)The summarised statements of comprehensive income for APPLE Limited (APPLE), ORANGE Limited (ORANGE) and PEAR Inc. (PEAR) for the year ended 31
=+i APPLE acquired 75% of the ordinary share capital of ORANGE on | January 1998 for €25 million when the book value of the net assets of ORANGE was €20 million.The fair value of the net assets
=+. Following the acquisition of shares in ORANGE, the directors of APPLE wished to expand abroad. On 1 January 2000, APPLE acquired 75% of the ordinary share capital of PEAR, an American company,
=+. The book value of PEAR’s inventory on 31 December 2002 and 31 December 2003 was $400,000 and $450,000 respectively. Inventory held at the end of 2002 and 2003 was purchased on 1 December in
=+. The translated post-acquisition reserves of PEAR at 31 December 2002 and 2003 were€4,950,000 and €5,550,000 respectively.. Exchange rates have been as follows:US$ = €1 1 January 2000 2.0 1
=+31. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION OF FOREIGN OPERATIONS 1 January 2003 1 December 2003 31 December 2003 Average 2003 621
=+v6. APPLE exercises a dominant influence over the activities of both ORANGE and PEAR, and accounts for dividends on a received basis.Requirement Prepare the consolidated statement of comprehensive
=+Question 6 Based on ICAI, P3 Summer 2005, Questions 1 & 2)You are an accountant with GOLD Group ple (GOLD), an Irish company involved in mining precious metals. You have responsibility for the
=+622 INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING Draft Statement of Financial Position as at 31 December 2005 GOLD SILVER COPPER€'000 €'000 $000 ASSETS Non-current Assets \Plant and
=+1. On 1 January 2005, GOLD acquired 4,000,000 €1 ordinary shares in SILVER. On this date the book value of the net assets of SILVER approximated to their fair value.For the purposes of measuring
=+2. On 1 January 2003, GOLD purchased 300,000 $1 ordinary shares in COP- PER, an American company, when there was a credit balance of $2,000,000 on the revenue reserves of COPPER. On this date the
=+3. The directors of GOLD believe that the goodwill arising on the acquisition of SILVER and COPPER was impaired for the first time during the year ended 31 December 2005 by €1,720,000 and
=+4. The rates of exchange were as follows:1 January 2003-— $2:€1 31 December 2005 — 150;51 1 January 2005-— $1.80:€1 Average rate 2005 $1.60:€1 v5. On 1 January 2005, GOLD entered into a
=+6. On 1 January 2005, GOLD was granted a licence to commence mining for precious metals in the mountains of Mourne. Under the terms of the mining agreement, GOLD must restore the mountains to their
=+7. On 23 January 2006, GOLD made a one for three rights issue to existing ordinary shareholders. This involved the issue of 4,000,000 €1 ordinary shares for a consideration of €6,000,000. This
=+(a) Prepare the consolidated statement of comprehensive income of the GOLD Group for the year ended 31 December 2005 and the consolidated statement of financial position as at that date.
=+(b) Prepare a memorandum addressed to the Board of GOLD explaining the rationale for the way in which the following issues were dealt with in-the financial statements of GOLD for the year ended 31
=+Smith Limited bought 80% of the share capital of Jones Limited for €324, 000 on 1 October 20X5. At that date Jones Limited’s retained earnings stood at €180,000. The statement of financial
=+634 INTERNATIONAL FINANCIAL ACCOUNTING AND REPORTING No entries have been made in the accounts for any of the following transactions. Assume that profits accrue evenly throughout the year and that
=+Requirement Prepare the consolidated statement of comprehensive income for the year ended 30 September 20X8, and the statement of financial position as at that date} under each of the following
=+(a) Smith Limited sells its entire holding in Jones Limited for €650,000 on 30 September 20X8; and
=+(b) Smith Limited sells its entire holding in Jones Limited for €650,000 on 30 June 20X8.
=+(Assume that no goodwill is written off due to impairment.)Challenging Questions Using the information provided above for Review Question 1, Smith Limited.Requirement Prepare the consolidated
=+(a) Smith Limited sells one quarter of its holding in Jones Limited for €160,000 on 30 June 20X8; and(b) Smith Limited sells one half of its holding in Jones Limited for €340,000 on 30 June
=+The following is a summary of the balances in the books of Black Limited as at 31 March 20X2: Black Limited = Assets Non-current assets Property, plant and equipment Investment in Bird: 75,000
=+MORN Limited, NOON Limited and NIGHT Limited are three companies involved in the production of television programmes, primarily dealing with news and current affairs. A number of the management
=+ROCK does not accrue dividends or interest receivable. The directors of ROCK belive that the goodwill arising on the acquisition of ROLL was impaired for the first time by €333,000 during the
=+Dividends proposed, but not yet approved, at 31 December 2004 to ROLL’ preference and ordi- nary shareholders amount to €32,000 and €160,000 respectively. At 31 December 2003, ROLL has

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