FRA Topic test - Langer

CFA Level II FRA
#1

Q1. Why is option 1 not a better answer than 3?

1 says the final value of inventory will be determined on Nov 15th (which is true as you’ll net the Nov payment with Oct balance sheet rates) It’s true and a certainty.

3 says there will be an fx loss in 2014 NI based on economic forecast

3 is a contingency, it may not happen. 1 is a surety .

What am I missing …

#2

inventory is recorded when you receive it or when it’s ready to be used along with a new entry under account payable since payment is of future date.

you do not change the value of the inventory in your balance sheet on Oct 31st or Nov 15th and the FX loss is included in income statement rather than affecting the balance sheet.

NOTE THAT THIS IS DIFFERENT FROM TRANSLATING FINANCIAL STATEMENTS.

DISCLAIMER: I MIGHT BE WRONG, PLEASE CORRECT ME IF I’M WRONG.

#3

+1 to Edbert. This is how I understand it, too.

At accounting year end you account for the unrealized FX gain or loss in the I/S and at the date of the settlement you again record the realized loss or gain.

#4

Inventory recorded on purchase date -> this is the amount of inventory

Then add foreign exchange loss on payment date

At year end, you have a realized foreign exchange loss (in 2014 not in 2015) -> I/S

Its not unrealized. It is realized when payment is made.

The point here is FX loss is added because payment is deferred.

BB example 2 shows when payment is due following year

Then at year end you record unrealized loss in I/S

#5

I’m aware of the translation rules (I mentioned it will be netted on Nov15 against Oct balance sheet date)

I guess I went wrong in thinking inventory value includes fx effect too.

However, the economic forecast would still be a poor choice of answer, IMHO.

#6

So I stumbled over the same question. Schweser is not revailing the specifics here. So I am correct to assume that

  • inventory is always measured as amount in foreign currency x historical rate at date of purchase and
  • FX losses (or gains) that occure afterwards due to difference in purchase to payment date are not capitalized into this inventory?
#7

Under both US GAAP and IFRS, inventory is recorded at historical rates and any realised/unrealised FX gain/loss is on I/S. (either other operating income/expense or non-operating income/expense) -> COGS is fixed, gross profit is not affected.

Under current rate method,

  • Subsidiary’s non-monetary assets (inventory, PPE) are translated at current rates.

  • Translation adjustment(+) is made on stock holder’s equity

Under temporal method,

  • Subsidiary’s non-monetary assets at historical rates,

  • Translation gain/loss(-) is made on I/S

#8

Well, discussion is not about translating the financial statement to another currency, but to understand how a transaction in a foreign currency is reflected in the BS, especially regarding the CV of inventory. I do not think that temporal or current rate method are relevant here?

#9

FX gain/loss is already on I/S so if subsidiary is translated under current method, translation adjustment is on equity

that’s what I’m trying to say

#10

FX gain/loss is not added to inventory because both US GAAP and IFRS say so

#11

I think it is to do with earnings quality. FX gain/loss goes to bottom line to reflect true EBIT EBITDA