Do we assess the net monetary asset or liability based on the (monetary assets and liabilities at the date of the acquisition or the end of year)
Based on the balance sheet (which is end of period)
In the CFA item sets, they used the acquisition date financials!
EXHIBIT 2
SELECTED FINANCIAL INFORMATION OF TAGUS SA AT ACQUISITION AND YEAR-END (EUR THOUSANDS)
Balance Sheet** Balance Sheet **Income Statement Date of Acquisition (30 June 2015) Year-End (31 December 2015) Six-Month Period Ending 31 December 2015 Cash and accounts receivable 4,000 4,200 Revenues 8,200 Inventory 2,000 2,250 Operating costs 6,485 Capital assets 15,000 14,625 Operating income 1,715 Total assets 21,000 21,075 Interest expense 395 Earnings before taxes 1,320 Current liabilities 3,500 3,400 Income taxes 395 Long-term debt 10,000 9,750 Earnings after tax 925 Share capital 5,000 5,000 Dividends 500 Retained earnings 2,500 2,925 Total liabilities and shareholders’ equity 21,000 21,075
Q. The most likely effect of the change in the exchange rate between the EUR and GBP arising from Thames’s investment in Tagus in 2015 will be a translation:
- loss reported in net income.
- adjustment reported in other comprehensive income.
- gain reported in net income.
Solution
A is correct. Thames is using the temporal method for its translation of Tagus, and the initial exposure is a net liability exposure (monetary liabilities of EUR13,500 exceed the monetary assets of EUR4,000). The EUR strengthened against the GBP during the six-month period (from GBP0.7200/EUR to GBP0.7500/EUR). The net effect of having a net liability position in a strengthening currency will be a translation loss for Thames, which, under the temporal method, is reported in net income.
And in 2017 reporting year, how will the company report Thames’s investment to determine net liability exposure for that year?
it is 2015 where did you get 2017!