Seems like some people need to review this section based on the CFA free practice exam results. Here is a warm-up: The Schuldes Company had the following reported assets in euros at historical cost for the period ending December 31, 2005. Cash-------------------------134 Accounts receivable-------270 Inventory-------------------404 Net fixed assets-----------1347 Total assets----------------2155 The exchange rate per was $0.8734 on January 1, 2005 and $0.9896 on December 31, 2005. The average exchange rate for the year 2005 was $0.8925. The total assets of Schuldes using the current rate method are: A) $2,133. B) $2,178. C) $1,882. D) $1,923.
I liked that thread you guys had going on Derivatives yesterday. I need work on FSA. A.
$.9896 * 2,155 = $2,132.59. So “A”. I personally think this question is extremely poorly worded. It literally took me 2 minutes to understand what the heck they were saying. Why can’t the CFA just be straight forward?
A 2155*0.9896
2132.588 = A
Nice job. A is the correct answer. For the All-Current method, every balance sheet item except for equity uses the current exchange rate (hence the name). Here’s one that is a little trickier… Given the following balance sheet information, what is the Cumulative Translation Adjustment for the year 2006? Functional currency is the Euro, reporting currency is the greenback. We are using the All-Current Method. For 2006 Current Assets:----E800 Fixed Assets:-------E900 Total Liabilities------E860 Common Stock------E230 Total Equities--------E1700 *Net assets for 2005 were E714 2005 Year End Exchange Rate = 1.06 E/ 2006 Year End Exchange Rate = .95 E/ 2006 Average Exchange Rate = 1.02 E/$
(1700 - 714)E = 986E FE — 986*(1/0.95 - 1/1.02) = 986*(1.0526- 0.98039) = 986*0.07221 = 71.19906 HE — 1700*(1/0.95 - 1/1.06) = 1700*(1.0526- 0.943396) = 1700*0.109204 = 185.6468 71.19906 + 185.6468 = 256.84586?
While you guys are working on that one, here is one that is a little more fun. We’ll call it #3. Heltzel is using the all-current method of translation to evaluate a subsidiary - Winski Lumber, and determines that Winski has a negative beginning currency exposure. As he is working, he starts a conversation with a colleague in the finance department, Nicole Lee. In their conversation, Heltzel states, “If Winski’s local currency appreciated from 2004 to 2005 and the change in currency exposure was negative, the flow effect would have been positive.” Lee replies, “the appreciation of the local currency would have also provided a negative holding effect, and the net result would be a translation loss recorded on the financial statements.” With regard to their statements: A) Heltzel’s statement is incorrect, and Lee’s statement is correct. B) Heltzel’s statement is incorrect, and Lee’s statement is incorrect. C) Heltzel’s statement is correct, and Lee’s statement is incorrect. D) Heltzel’s statement is correct, and Lee’s statement is correct.
dinesh.sundrani Wrote: ------------------------------------------------------- > (1700 - 714)E = 986E > > FE > — > 986*(1/0.95 - 1/1.02) = 986*(1.0526- 0.98039) = > 986*0.07221 = 71.19906 > > HE > — > 1700*(1/0.95 - 1/1.06) = 1700*(1.0526- 0.943396) = > 1700*0.109204 = 185.6468 > > 71.19906 + 185.6468 = 256.84586? You are on the right track but you have the net assets wrong. You listed 986 and 1700. The problem lists the 2005 net assets as 714 so I’ll give you a hint, the holding effect is 714 * [(1/1.06 - 1/.95)] =78. Now what is the flow effect? Then you will have the answer. I’m impressed though, your process was almost flawless. The inputs are where you mixed up.
Thanks Dwight - for the hint. I still think I am way off here? (1700 - 714)E = 986E FE — 986*(1/0.95 - 1/1.02) = 986*(1.0526- 0.98039) = 986*0.07221 = 71.19906 HE — 714*(1/0.95 - 1/1.06) = 714*(1.0526- 0.943396) = 714*0.109204 = 77.971656 71.19906 + 77.971656 = 149.170716?
Hold 714 * (1/0.95 - 1/1.06) flow (840 - 714) (1/0.95-1/1.02) I think total equity number is wrong there so I did 1700-860 = 840. Result 87.1
I get FE: 126*(1/.95 - 1/1.02) = 9.10 HE: 714*(1/.95 - 1/1.06) = 78 Total = 87.10? For the third question: D? Were are you getting these questions? They are very good.
Nice get Disptra. Dinesh, to get Net Assets for *2006* you had to subtract total liabilities from current +fixed assets. Then to get the flow effect you had to subtract net assets from 2005 from net assets for 2006 and multiply that by the difference in the exchange rates. As Disptra did. The example is excerpts from CFA Lev II FSA page 170 - 174 if you want to review the whole thing.
Holding Effect: 714 * (1.0526-.9434) = 77.97 Flow Effect: (840-714) * (1.0526-.9804) = 9.10 Total: 87.07
I think both effect are negative. So A?
A? FE = delta (exposure) + (ER - AR) LC appreciates so, HR < AR < ER (ER - AR) = + ve delta (exposure) = -ve (given) Ans = -ve You have net liabilites, so bad if the LC is going up… you losing. So yes, HE will be -ve Total = -ve + -ve = -ve (loss on financials)
Dwight Wrote: ------------------------------------------------------- > Nice get Disptra. Dinesh, to get Net Assets for > *2006* you had to subtract total liabilities from > current +fixed assets. Then to get the flow > effect you had to subtract net assets from 2005 > from net assets for 2006 and multiply that by the > difference in the exchange rates. As Disptra > did. > > The example is excerpts from CFA Lev II FSA page > 170 - 174 if you want to review the whole thing. sorrrrrry I am dead tired today… and my brain is not working now… so many silly mistakes probably the final version… FE — [(800 +900-860) - (714)]*(1/0.95 - 1/1.02) = 126*(1.0526- 0.98039) = 126*0.07221 = 9.09846 HE — 714*(1/0.95 - 1/1.06) = 714*(1.0526- 0.943396) = 714*0.109204 = 77.971656 9.09846 + 77.971656 = 87.070116
Niblita75 Wrote: > Were are you getting these questions? They are > very good. Either pulled from CFA readings or off of the Q Bank.
i’d think both effects negative so that’s A? back to the middle one- for all current isn’t net exposure assets - liabilities or shareholder’s equity. how do we know that the beginning exposure = that “net assets” 714 number? is “net assets” assets - liabilities? just not familiar with it called that if yes. this is a great problem- these are the dumb ones i mess up all of the time. stupid holding/flow effects. grrr.
Here is a random one: Monthly internal reporting to the Chief Operating Officer (COO) and Chief Executive Officer (CEO) at Ludicom Corp. includes segment data on the following items. Which is the company least likely to be required to disclose under SFAS 131? A) Sales of more than 5% to any one customer. B) Interest income. C) Investments in equity income investees. D) Extraordinary items.