If the hryvnia is chosen as the Ukraine subsidiary’s functional currency, Eurexim will translate its inventory using the:

A. average rate for the reporting period.

B. rate in effect at the end of the reporting period.

C. rate in effect at the time the inventory was purchased.

Pedro Ruiz is an analyst for a credit rating agency. One of the companies he follows, Eurexim SA, is based in France and complies with International Financial Reporting Standards (IFRS). Ruiz has learned that Eurexim used EUR220 million of its own cash and borrowed an equal amount to open a subsidiary in Ukraine. The funds were converted into hryvnia (UAH) on 31 December 20X1 at an exchange rate of EUR1.00 = UAH6.70 and used to purchase UAH1,500 million in fixed assets and UAH300 of inventories. Ruiz is concerned about the effect that the subsidiary’s results might have on Eurexim’s consolidated financial statements. He calls Eurexim’s Chief Financial Officer, but learns little. Eurexim is not willing to share sales forecasts and has not even made a determination as to the subsidiary’s functional currency.

Absent more useful information, Ruiz decides to explore various scenarios to determine the potential impact on Eurexim’s consolidated financial statements. Ukraine is not currently in a hyperinflationary environment, but Ruiz is concerned that this situation could change.

Ruiz also believes the euro will appreciate against the hryvnia for the foreseeable future.