# Deceivingly simple Currency Question from the Qbank

Tip of the hat to Schweser Level II Qbank: In January, when 200 Yen purchased 1 dollar, a Japanese subsidiary of a US company borrowed \$3,000,000 from a bank, payable in December with 3% interest. When the loan and interest (total of \$3,090,000) was paid, a dollar was worth 210 Yen. The functional currency of the subsidiary is Yen. The average rate was 205 Yen per dollar. The Japanese subsidiary will report: A) No gain or loss B) A currency loss of 15,450,000 Yen C) A currency loss of 30,900,000 Yen D) A currency loss of 30,000,000 Yen

C) A currency loss of 30,900,000 Yen They originaly has a liability of 3,090 X 200 = 618,000 Yens They repaid 3,090 X 210 = 648,900 Yens They have a currency loss of 618,000 - 648,900 = 30,900 Yen Note: this question does not relate with either the all-current method nor the temporal method. We are looking at the book of the sub. The fact that this is a sub (vs a local japanese company) is irrelevant. Would we have looked at the books of the parent, the all-current method would have been applied.

^ What he said

> > Note: this question does not relate with either > the all-current method nor the temporal method. > We are looking at the book of the sub. The fact > that this is a sub (vs a local japanese company) > is irrelevant. > Would we have looked at the books of the parent, > the all-current method would have been applied. So if neither the temporal nor all current method apply, then why did you convert your calculations to yen? They borrowed \$3,000,000 and paid it back with interest, right? Where’s the gain / loss in that?

plyon Wrote: ------------------------------------------------------- > > > > Note: this question does not relate with either > > the all-current method nor the temporal method. > > We are looking at the book of the sub. The fact > > that this is a sub (vs a local japanese > company) > > is irrelevant. > > Would we have looked at the books of the > parent, > > the all-current method would have been applied. > > > So if neither the temporal nor all current method > apply, then why did you convert your calculations > to yen? They borrowed \$3,000,000 and paid it back > with interest, right? Where’s the gain / loss in > that? Their books are in Yen. If a US company owns Swiss francs, it will still report its financials in US Dollars. Hence, it will have to show the value of its (SFr) holding in its reporting currency, the US Dollar. Same thing here, the Japanese company reports its financials in Yen. Hence, it will have to show the value of the loan in Yen.

> > Their books are in Yen. > > If a US company owns Swiss francs, it will still > report its financials in US Dollars. Hence, it > will have to show the value of its (SFr) holding > in its reporting currency, the US Dollar. > > Same thing here, the Japanese company reports its > financials in Yen. Hence, it will have to show the > value of the loan in Yen. Yeah… I get that. And you think that "does not relate with either the all-current method nor the temporal method. "?

plyon Wrote: ------------------------------------------------------- > > Yeah… I get that. > > And you think that "does not relate with either > the all-current method nor the temporal method. "? Yep, it you have a financial instrument (and have netted out your position), you record the capital gain/loss based on the current rate at the time you entered into the position and based on the current rate at the time you closed you position. (what happens in between is another story, and a third of the FSA material is there to discuss that) That’s valid for bonds, stocks, derivatives, weather related futures … and currency holdings. And I confirm that it does not relate with either the all-current method nor the temporal method. The all-current method and the temporal method are to be used when translating (remeasuring) the financials of the sub for the purpose of consolidating those with the financials of the parent. We are ultimately looking at the financials of the parent. Here, we are only concerned by the books of the Japanese company (“The Japanese subsidiary will report”). Hence, we could not care less that it has a parent.

Aren’t you simply re-measuring the dollar bonds into Yen?