Short two part question: 1) They only example I see of handling hyperinflation under IFRS is page 206, book 2, schweser, and no practice problems in either CFAI or Schweser. Anyone can tell me where I can get some practice on this? QBank Question #ID? 2) In Afternoon section, BSAS Practice Test Question numbers 14-15, they refer to the “translation effect” on Koko Boats, which apparently means the difference in translation between this year and last year. Is there a difference (perhaps in wording only) between that and in finding the translation adjustment? Is there another way to find the CTA/remeasurement gain besides the “plug” method shown in Schweser, or do I have to memorize the “CTA=Flow Effect + Holding Effect” method just to be safe?
If your financial liabilities are greater than your financial assets then in a hyper inflationary environment (assumes that the currency depreciates) you are going to post a CTA gain; a loss if things are the other way around. If you think about it this way, it makes a lot of sense. If I owe a ton of money and that money is depreciated, I owe less. On the other hand, If I have a lot of money and that money is depreciated, I lose.
holding effect and flow effect is not part of the curriculum for this year. so ignore those questions. translation effect is basically CTA This year - CTA last year. (Gain / loss due to translation). which is pretty easy to do: (A - L) (@ current rate this year) - CS @ historic - NI @ average cost = CTA Current year. (A - L) (@ current rate last year) - CS @ Historic - NI @ Average = CTA last year.
cpk: Don’t you need the Beginning Retained Earnings and Ending Retained Earnings to calculate CTA? That’s the problem with Schweser; the “plug” method only works if you have those two items. Since the CTA does not go on net income like in temporal method, you can use Ending RE=Beginning RE+Net Income, and solve for Ending RE minus Beginning RE. But I would need just ending RE to calculate CTA for this year, not Ending RE minus Beginning RE.
Actually, the actual calculations for gains/losses under the temporal method is current year monetary assets less current monetary liabilities then take this number and subtract it from previous year figures plus the sales, less purchases, less dividends, less other expenses. For the current rate, add the previous year net assets plus net income less dividends then subtract this from the current year net assets
the “plug stuff” from schweser that youre referring to, is that the flow effect that we dont need to know, or do we need to know that
golfer Wrote: ------------------------------------------------------- > Actually, the actual calculations for gains/losses > under the temporal method is current year monetary > assets less current monetary liabilities > then take this number and subtract it from > previous year figures plus the sales, less > purchases, less dividends, less other expenses. > When you say “previous year’s figures, what does that mean?” What are previous year’s figures?
Sorry cpk, could you explain why the formulas you give below (which result in Ending retained earnings minus beginning retained earnings) give you this year’s CTA? How do you get CTA without knowing beginning retained earnings? I thought you use RE ending=RE beginning+Net Income-Dividends to get ending RE, then you do A-L-Common Stock-Retained Earnings=CTA. (A - L) (@ current rate this year) - CS @ historic - NI @ average cost = CTA Current year. (A - L) (@ current rate last year) - CS @ Historic - NI @ Average = CTA last year.
rellison Equity=> is translated at the Average rate. (incl. effect of the CTA adjustment). Because A and L are translated at the Average rate. Equity has parts: A. Common Stock -> this is the Historic rate B. So removing the CS at Historic you get the RE Ending. If you had two years data provided -> 2006 and 2007 and the company started to account for a foreign sub in 2006 -> the RE Begin in 2006 would be 0. And you might / might not be given dividends. So RE Ending = NI for that period. Using the NI Average -> you got the CTA for 2006. If you are with me thus far -> RE End 2006 translated = RE Begin 2007 translated. Now you can go thro the same process again - and get to the CTA for 2007.
previous year figures…the balance sheet items for last year