Question 2
According to IFRS, what disclosures should be included relating to Ambleu’s treatment of foreign currency translation for Ngcorp?
Options:
a restatement for local inflation.
that assets carried at historical cost are translated at historical rates.
the amount of foreign exchange differences included in net income.
Context:
Ambleu complies with IFRS, and its presentation currency is the Norvoltian krone (NVK). Ambleu’s two subsidiaries, Ngcorp and Cendaró, have different functional currencies: Ngcorp uses the Bindiar franc (₣B)
Transaction mentioned in the question: * Ngcorp obtains a loan in Bindiar francs on 1 June 2016 from a European bank with the Norvoltian krone as its presentation currency.
The answer is Option 3, but my question is back in level I, foreign currency gain/loss is a part of OCI, not Net Income, which would make C also wrong as well?
Thank you kindly for reading & would really appreciate any opinion on this matter.
I think you have missed a bit out from the question.
It is a bit confusing as we have the actual questions but aslo the word “question” in the item set
Q5 of thh questions on item set says:
5. Based on Exhibit 1, the best response to Question 2 is that Ambleu should disclose:
A. a restatement for local inflation.
B. that assets carried at historical cost are translated at historical rates.
C. the amount of foreign exchange differences included in net income.
Transaction 3 in the items set says : “Ambleu imports inventory from Bindiar under 45-day credit terms, and the payment is to be denominated in Bindiar francs.”
And exhibit 1 gives a list of fx rates which move about.
Amblu is going to have fx gains and losses due to this transactions as there is a difference between when the transaction is booked in inventory and when payment is made. These gains and losses are booked in net income.
From text: When an export sale (import purchase) on an account is denominated in a foreign currency, the sales revenue (inventory) and foreign currency account receivable (account payable) are translated into the seller’s (buyer’s) functional currency using the exchange rate on the transaction date. Any change in the functional currency value of the foreign currency account receivable (account payable) that occurs between the transaction date and the settlement date is recognized as a foreign currency transaction gain or loss in net income.
I am still confused about how this question is phrased. This question (Q5) asks about what the best response to Question 2 (from the supervisor) is. Question 2 talks about the relationship of Ambleu with its subsidiary Ngcorp (Bindar Franc is functional currency), not about the import of Ambleu from Bindiar (Transaction 3)
If it is about the relationship of the parent with its subsidiary (as Question 2 suggests), then this would have to do with TRANSLATION gain or loss (as this is how you reflect the foreign subsidiary in the consolidated financial statements)
If it is about the import of Ambleu from Bindiar, then I agree that this has to be reflected as a transaction gain or loss. However, nowhere in Question 2 does it talk about Transaction 3.
FX rates used = Current translation method
NGcorp function currency = Bindar
Ambleu Presentation = NVK
Look at three answers
A - hyperinflation not an issue - not correct answer
B - Current method uses current rate for historical items - not correct answer
C - the amount of foreign exchange differences included in net income.
The questions does not refer directly to any of the transactions mentioned in the text just to accountig for NGcorp. General disclosures required -= quoted from syllabus
Disclosures Related to Translation Methods
Both IFRS and US GAAP require two types of disclosures related to foreign currency
translation:
the amount of exchange differences recognized in net income, and
the amount of cumulative translation adjustment classified in a separate
component of equity, along with a reconciliation of the amount of cumulative
Under Current method FX losses are in CTA and B.Sheet there could still be issues - up and downstream sales that mean there are effects on the income statement.
I think C is your best answer, given the 3 options