Reading 15 ■ Multinational Operations - Question 30

CFA Level II FRA
#1

For question 30,

Based on Exhibit 1 and Note 1 in Exhibit 2, the amount that Ambleu should include in its 31 December 2017 revenue from Cendaró is closest to:
A NVK10.60 million.
B NVK13.25 million.
C NVK19.73 million.

Answer:
A is correct. Crenland experienced hyperinflation from 31 December 2015 to 31 December 2017, as shown by the General Price Index, with cumulative inflation of 128.2% during this period. According to IFRS, Cendaró’s financial statements must be restated for local inflation, then translated into Norvoltian kroner using the current exchange rate. The 2017 revenue from Cendaró that should be included in Ambleu’s income statement is calculated as follows:
Revenue in CRG × (GPI 31 December 2017/GPI average 2017) = Inflation-adjusted revenue in CRG
CRG125.23 million × (228.2/186.2) = CRG153.48 million
Inflation-adjusted revenue in CRG/31 December 2017 exchange rate (CRG/NVK) = Revenue in Norvoltian kroner
CRG153.48 million/14.4810 = NVK10.60 million

I can’t figure out why are we using GPI Dec 2017 divided by the GPI average 2017 instead of GPI Dec 2017 divided by GPI Dec 2016? Can anyone please enlighten me?
Thank you!!!

#2

Because you are dealing with revenue, an income statement account. Revenue accumulates throughout the year so taking the average is more representative than taking a point in time.

#3

I can get around with using average GPI. What I can’t get around is using Dec 31 2017 exchange rate (14.4810) and not the Average rate (11.5823) for the final calculation since we are converting revenue. When I saw that, I thought that has to be wrong. I went to the errata and no correction on there. Can someone explain why the end of yr exchange rate was used and not the average since revenue is always converted with average?

2 Likes
#4

Hey cuz CRG is in a highly inflationary economy. And according IFRS, in a highly inflationary economy “the inflation-restated foreign currency financial statements are translated into the parent’s presentation currency using the current exchange rate” as written in the textbook.

#5

Thank you