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CHAPTER 9
Reporting Foreign Operations
This chapter focuses on the theory and practice of translating foreign operations. Two
translation methods, temporal and current-rate, are described and illustrated in a simple
example. The concept of economic exposure to the risk of changes in foreign exchange
rates is then introduced and is contrasted with the accounting exposure. Accounting
exposure is a function of the translation method used and is unlikely to reflect the
economic exposure. After relating the concept of economic exposure to the alternative
translation methods, the IFRS functional currency approach is illustrated in a more
complex example. The reporting of translation gains and losses in the parent’s financial
statements is discussed quite extensively, since it is the reporting of these gains and losses
that caused so much controversy.
This chapter is intended to lay the basic foundation for understanding the concepts
underlying the different methods of translation and the results of applying the methods in
relatively simple situations. There is no intent to be exhaustive in the treatment of the
complexities of translating foreign operations. For example, there is no discussion of the
interrelationship between inflation adjustments and foreign currency translation. In
addition, the statement of cash flows, which is fairly straight-forward under the temporal
method but more complex under the current rate method, has not been addressed. We
believe that these additional complexities are not essential to an understanding of the
basic issues underlying the reporting of foreign operations.
SUMMARY OF ASSIGNMENT MATERIAL
Case 9-1: Global corp.
This is a relatively short case that requires the student to analyze the facts to determine
the functional currency of five subsidiaries. Several of the situations described require
judgment and provide the student with the opportunity to identify the information that
was key in making their decisions.
Case 9-2: Elite Distributors Limited
This is a straightforward case that illustrates a foreign sales office and subsidiaries with
different functional currencies. Consolidation and segment reporting issues are touched
upon as well.
Case 9-3: Care Inc.
This is also a short case that requires the student to analyze the facts to determine the
functional currency of the subsidiary. A description of each of the temporal and current-
rate methods of translation is also required.
Copyright © 2014 Pearson Canada Inc. 436

Chapter 9 – Reporting Foreign Operations
Case 9-4: Multi-Communications Ltd.
This is a past CICA case from 1993 that asks the student to discuss the accounting and
auditing implications of specific issues. The issues include foreign exchange gain,
investment in a country that is highly inflationary, purchase price adjustment, and other
issues. The required could be adapted to have the student only discuss the accounting
implications.
Case 9-5: Johnston Co. Ltd.
This case addresses the issue of how a foreign operation should be organized in order to
achieve the desired financial statement impacts.
Case 9-6: Buy Cartier Ltd.
This is a case from an ICAO School of Accountancy practice exam which requires
accounting and audit issues that might arise during a meeting with the auditor to be
identified and discussed. The main issues to be identified include the acquisition of
subsidiaries, a change in presentation currency, pre-operating costs and government
subsidies.
P9-1 (30 minutes, easy)
This case requires translation of an SFP under each of the two methods; calculation of the
accounting exposure and the gain or loss that would result from a further change in
exchange rates. It’s a straight-forward problem illustrating the reporting effects of a
strengthening foreign currency.
Translation of an SCI under both current rate and temporal methods; includes a detailed
cost of goods sold computation and interest expense (accrued during the year but paid at
the end of the year). P9-12 builds on P9-2.
P9-3 (40 minutes, medium)
This problem illustrates the impact of the current rate vs. temporal methods by using a
very simple scenario. It highlights the concept of economic exposure and demonstrates
the logic underlying the concept of an implicit hedge. It is a good class discussion
problem.
This problem on translation of the equipment and accumulated amortization balances
when the functional currency of the foreign subsidiary is, in part 1, the same as and, in
part 2, is different from the parent's.
The translation of a SFP using the temporal method, a calculation of a translation gain or
loss on bonds payable, a calculation of the change in the cumulative translation

adjustment account and an explanation of the value calculated when translating capital
assets under current-rate method are required.
Translation of the financial statements of a foreign operation assuming a different
functional currency from the parent and assuming the same functional currency as the
parent.
Identifying, with support, the functional currency of a subsidiary. Translation of the SCI
and SFP assuming the functional currency is the same as the parent, including a
calculation of the exchange gains/losses. Translation of the SCI and SFP including a
calculation of the exchange gains/losses assuming a different functional currency from
the parent.
Translation of the SCI and calculation of the foreign exchange gain/loss and specific SFP
accounts assuming the same functional currency as the parent. Translation of specific
SFP accounts assuming a different functional currency and identification of factors to
establish the subsidiary’s functional currency.
P9-9 (90 minutes, difficult)
Identification, with support, of the functional currency of a subsidiary. Translation of the
financial statements using the current-rate and temporal methods including calculation of
translation gains or losses.
This problem requires the calculation of gain/loss using the temporal and current-rate
methods. Translation of SFP and SCI assuming the same functional currency as the
parent and assuming a different functional currency from the parent.
Translation of selected data for a comparative SFP, using the temporal method. Some
irrelevant information is given, so that the answers are not obvious from the problem.
P9-12 (60 minutes, difficult)
Unless the assignment of this problem is limited to requirements 1. and 2., P9-2 must be
solved first. This problem requires translation of a comparative SFP under both the
current rate and temporal methods, and analysis of the translation gains and losses for the
year. The problem requires calculation of translated retained earnings for the subsidiary
and requires detailed computation of the components of the net translation loss under the
temporal method.

Identification, with support, of the functional currency of a subsidiary. Translation of
selected data using the current-rate and temporal methods. Calculation of the
translation gain or loss under both the current-rate and the temporal methods.

ANSWERS TO REVIEW QUESTIONS
Q9-1: A foreign currency transaction is a direct transaction of a Canadian company that
is denominated in a foreign currency. A foreign currency operation is a subsidiary or a
branch that is located in a foreign country and that carries on its business in a foreign
currency.
Q9-2:
a. Temporal: All monetary balances and balances of items that are reported at current
value are translated at the current exchange rate; all other balances are translated at their
historical rates.
b. Current rate: All balances are translated at the current rate of exchange, although the
current rate may be the average for the current year in the case of income statement
items.
Q9-3: The temporal method yields results that are the same as would have been obtained
had the parent conducted the same transactions directly as foreign currency transactions
rather than through a foreign subsidiary.
Q9-4: The common share account of a foreign subsidiary represents the parent’s
investment, and is eliminated upon consolidation. The common share account is
translated at the historical rate in order to offset the investment account on the parent’s
books, which is carried at historical cost.
Q9-5: The accounting exposure is the extent to which gains and losses will result from
changes in exchange rates. It is measured as the net balance of items that are translated at
the current rate under a particular translation method.
Q9-6: Under the temporal method, the accounting exposure is the net balance of
monetary assets less monetary liabilities (plus items reported at current value). For
companies that use long-term debt as a source of financing, the accounting exposure is
usually a net liability exposure. Under the current-rate method, the accounting exposure
is the net assets, which is the same as the shareholders’ equity of the foreign subsidiary.
Q9-7: Yes. The accounting exposure under the temporal method often is a net liability
position, in which case a strengthening of the foreign currency will result in a translation
loss. Under the current rate method, however, the accounting exposure is almost always a
net asset position; a strengthening of the foreign currency will then result in a translation
gain.
Q9-8: Economic exposure is the extent to which the changes in the relative values of the
currencies impact on the earnings ability of the foreign subsidiary. Economic exposure
therefore is forward-looking and is difficult to measure, while accounting exposure is
backward-looking and is the mechanical result of the application of a translation method.

Q9-9: A net liability accounting exposure does not necessarily represent an economic
exposure. Only if the debt will be repaid in Canadian dollars within the foreseeable future
will there be a realization of any exchange loss arising from a strengthened foreign
currency. If the foreign operation will refinance its debt in the foreign currency or will
generate sufficient earnings in the foreign currency to service the debt, then there is no
economic exposure in terms of Canadian dollars. If Domop management hedges the
accounting exposure, then Domop is entering into a real economic exposure in order to
hedge an accounting exposure that may not be real in economic terms. The result will be
that instead of offsetting an existing economic risk, the hedge will be creating a risk
where none existed before. Domop should not hedge the liability exposure unless it is
reflective of its economic exposure to changes in the exchange rates.
Q9-10: The functional currency is the currency of the primary economic environment in
which the entity operates, which is normally the environment in which it generates and
expends cash. If Canada is the primary economic environment in which the parent
operates, then the parent’s functional currency is the Canadian dollar. The functional
currency is the currency used to measure an entity’s transactions.
Q9-11: The temporal method is recommended for translating the results of foreign
operations with the same functional currency as the parent. The temporal method yields
the same results as would have been obtained had the parent conducted its foreign
business by means of direct foreign currency transactions rather than through a foreign
operation. Since the foreign operation is, in essence, an extension of the parent’s own
operations, a translation method that gives the same outcome as foreign transactions is
appropriate.
Q9-12: The recommended disposition of translation gains and losses is to report them in
the same manner as gains and losses arising from foreign currency transactions, which
are reported in income.
Q9-13: In determining its functional currency, management of a company should first
look to the following factors:
1. The currency that influences the selling prices for its goods and services. IFRS
note that this will often be the currency in which prices are denominated and
settled.
2. The currency of the country whose competitive forces and regulations determine
the selling prices for its goods and services.
3. The currency that influences its costs of providing goods and services. IFRS note
that this will often be the currency in which these costs are denominated and
settled.
If the functional currency is not easily determined from the primary factors above,
management of a company should also consider the following factors in determining its
functional currency.
1. The currency in which financing activities are conducted. This would encompass
the issuing of debt and selling of shares.

2. The currency in which cash from operating activities is kept.
3. Whether the activities of the foreign operation are conducted independently of the
parent or as an extension of the parent.
4. Whether the foreign operation conducts a low or high proportion of its activities
with the parent.
5. Whether the cash flows of the foreign operation directly affect the cash flows of
the parent and are readily available to the parent.
6. Whether the cash flows of the foreign operation are sufficient to service its debt
obligations without the need for funds from the parent.
It is often the case that the determination of the functional currency is not obvious from
the above factors. The selection of a functional currency in these situations is a matter of
professional judgment. The choice should be the one that most faithfully represents the
economic impact of the activities of the company.
Q9-14: Each foreign operation is evaluated individually when the parent company
management is determining the functional currency of its foreign subsidiaries. Some of
its subsidiaries may have the same functional currency as Mammoth Corporation while
others may have a different functional currency.
Q9-15: The current-rate method is recommended to be used for foreign operations with a
different functional currency than the parent's.
Q9-16: The average rate is used for the income statement items because this method
results in the same amounts in the presentation currency regardless of how a foreign
operation is translated into the presentation currency. For example, this method will
provide the same results if the subsidiary is directly translated into the presentation
currency or if the subsidiary is first translated into the functional currency of the parent
and then into the presentation currency. (Another reason for its use is so that the interim
earnings will accumulate to the annual earnings. If the closing rate (that is, at the balance
sheet date) were used on the annual income statement, there would be an undesirable
change in reported earnings caused not by last-quarter earnings but simply as the result of
using a different exchange rate for the quarterly statements than for the annual
statement).
Q9-17: Under the current-rate method, cost of goods sold is translated by multiplying the
cost of goods sold in foreign currency by the average exchange rate for the year. Under
the temporal method, the cost of goods sold is disaggregated and the opening inventory,
purchases, and closing inventory are each multiplied by the appropriate historical
exchange rate for that component of cost of goods sold. The Canadian dollar cost of
goods sold is then derived from the translated components rather than being obtained
directly by multiplying the cost of goods sold by a single exchange rate.
Q9-18: Under the current rate method, depreciation and amortization are translated at the
average rate of exchange for the year. Under the temporal method, depreciation and
amortization are translated at the historical exchange rates that apply to the individual
assets being depreciated or amortized.

Q9-19: The gain or loss on monetary items is calculated by constructing a flow of funds
schedule. Starting with the beginning net balance of monetary items, flows during the
year are added and subtracted to derive the ending net balance of monetary items. The
balances and flows in the foreign currency are then translated at the rates in effect when
those balances existed and flows occurred. The difference in the derived Canadian dollar
ending balance and the actual foreign currency balance translated at the year-end rate is
the gain or loss for the period. The amount of gain or loss on net monetary items will not
be affected by the overall translation method used, because monetary items are translated
the same way under both translation methods.
Q9-20: In highly inflationary economies, the solution recommended in IFRS is to adjust
the foreign operation’s financial statements for changes in the price level in the foreign
country. The adjusted statements are then translated using the closing rate for all amounts
(assets, liabilities, equities, revenues and expenses).
CASE NOTES
Case 9-1: Global Corp
Objectives of the Case
The objective of this case is to have students determine the functional currency of five
subsidiaries of Global Corp. Judgment is required and students are asked to identify the
information that was key to making their decisions.
Indogold Inc
The functional currency is the currency of the primary economic environment in which
an entity operates. The primary economic environment is “normally the one in which it
primarily generates and expends cash” (IAS 21). Notice that the focus is on the cash
generated or spent therefore we will ignore depreciation costs because they are non-cash
costs. IAS 21 suggests that in determining their functional currency, an entity should look
to certain primary indicators first. These indicators relate to the currency “influences” on
the selling price of gold and the currency “influences” on the costs (labour, material and
supplies) to extract the gold. In Indogold’s case, its product, gold, is priced in US dollars,
therefore the US dollar is the currency that influences the sales price. Indogold’s cash
costs, although primarily local (50%), also have a significant US dollar cost (40%). Thus
the evidence on costs is mixed. An assessment of these facts would likely lead to the
conclusion that the functional currency for Indogold is the US dollar primarily because of
the obvious US dollar influence on revenue in conjunction with a mixed picture on costs.
Structured Entity
The structured entity is just a vehicle used to obtain and finance drilling equipment. It
does not have any operations therefore it would difficult to use the primary indicators to
determine the functional currency. Several of the secondary indicators may be of interest.

First note that IAS 21 suggests the currency in which financing activities are conducted
could be considered. In this case, the Euro was the “financing” currency therefore one
could be tempted to identify it as the functional currency. However, the other secondary
indicators should also be considered, in particular, the indicator that seeks to assess the
autonomy of the entity. If the entity is not autonomous then its functional currency is that
of its parent. In this situation, the financing was intercompany financing between the
parent and the SE. Further, given that the SE has no employees of its own and is
controlled by Global employees, it should be obvious that the SE is not independent of its
parent. In this case, the functional currency of the SE should be that of its parent, that is,
the Canadian dollar.
Northern Patriots
IAS 21 suggests that in determining their functional currency, an entity should look to the
primary indicators first. These indicators relate to the currency “influences” on the selling
price of goods and the currency “influences” on the costs (labour, material and supplies)
to sell the goods. In Northern Patriots’ case, its product selling prices are determined by
local competition (in US dollars), therefore the US dollar is the currency that influences
the sales price. Northern Patriots’ cash costs are mixed as its cost of goods sold is priced
in Canadian dollars but all other selling and administrative costs are priced in US dollars.
Although the evidence is mixed, the strongest evidence at this point is that the US dollar
is the functional currency.
The question arises as to whether management should proceed further to consider the
secondary indicators. This is a difficult question to answer and it will require
considerable professional judgment. It is clear that IAS 21 suggests that the primary
indicators are to be considered first. If a decision can be clearly made based on the
primary indicators, then the secondary indicators should not be considered. However,
given that the evidence is mixed for Northern Patriots, it may be that the case has not
provided sufficient evidence to allow an professional assessment of initial prognosis. We
would likely need more information before a definitive answer can be given. (For
example it would be useful to know the percentage of costs that are denominated in US
dollars.) If we can be confident that the functional currency is the US dollar, then there is
no need to proceed further.
If management do not believe that they have conclusive evidence as to the functional
currency, they should proceed to examine the secondary indicators. In this case, there is
evidence to suggest that Northern Patriots is not independent of Global. Northern
received all its financing from Global and further it remits all excess funds to Global. It
would be very useful to know the volume of intercompany transactions as clearly the
cash flows of Northern could impact the cash flows of Global. If management believes
that it had to proceed beyond the primary indicators and if there is evidence that Northern
is not autonomous, then the functional currency may be determined to be the Canadian
dollar. If however Northern does possess substantial autonomy, then management could
determine that the functional currency is the US dollar. In summary more information is
needed, first, to be able to assess whether management should proceed to considering the

secondary indicators and, second, to assess the degree of autonomy of Northern if
management proceeds to the secondary indicators.
East Asia Holdings Corporation
East Asia Holdings is a holding company that has no operations. The first two primary
indicators are not useful to the determination of the its functional currency because it
does not generate cash through the sale of goods or expend cash for labour and materials.
Further, with respect to the secondary indicators, it does not retain any dividends received
but forwards them to Global. Thus it does have any cash on hand and further it is not
involved in financing activities. It appears to be engaged in activities that the parent could
easily have done itself. Further there is no evidence to suggest that it is independent of
the parent. East Asia appears to be operating as an extension of the parent itself and
therefore the functional currency should be the same as the parent, that is, the Canadian
dollar.
Japan Manufacturing
Japan Manufacturing’s product selling prices are determined by local competition (in
Japanese Yen), therefore the Japanese yen is the currency that influences the sales price.
Japan’s cash costs are all are priced in Japanese yen therefore the yen is the currency that
influences its costs also. The evidence from both primary indicators is clear and strong
that the Japanese yen is the functional currency of Japan Manufacturing. Given this
conclusion, the secondary indicators should be ignored. (However it can be noted that the
secondary indicators also suggest the yen is the functional currency because they suggest
that Japan Manufacturing is independent of Global.)
Case 9-2: Elite Distributors Limited
The objective of this case is to see if students can recognize the difference between a
foreign operation with a different functional currency from the parent, a foreign operation
with the same functional currency as the parent, and a foreign sales office that conducts
foreign currency transactions for the domestic parent company.
U.S. Sales Office
The U.S. sales office is a branch, not a foreign subsidiary. It conducts no independent
activities but simply serves one operating function for the home office. Therefore, all
transactions through the sales office should be treated as foreign currency transactions,
and translated by the temporal method. The home office is fully exposed to the revenue
consequences of fluctuations in the US-Canada exchange rate.
It is not necessary to decide whether the U.S. office is a foreign operation or not. A
foreign operation need not be separately incorporated, but it is unlikely that an
unincorporated foreign operation would be self-sustaining. It is the nature of the

relationship between the home office and the foreign operation that indicates the way in
which foreign denominated transactions should be treated by the home office.
Since the U.S. office is not a subsidiary, consolidation is not an issue.
Singapore Subsidiary
The Singapore subsidiary is a supply source for the Canadian parent. Substantially all of
the Singapore subsidiary's output is sold to the parent, and therefore it is obvious that the
Singapore sub’s functional currency is the Canadian dollar. The parent company is
exposed on a day-to-day basis to the risk of exchange rate changes on the cost of
production. The temporal method of translation would most nearly match the economic
exposure of the parent. If the Singapore currency strengthens, relative to the Canadian
dollar, Elite will be worse off, and the temporal method will show that result in this
instance.
The Singapore sub is an integral part of Elite’s operations. The translated financial
statements of the Singapore subsidiary should be consolidated with those of Elite. Gains
and losses on current transactions and monetary balances should be reported in income.
Exchange gains and losses arising from prior years are included in opening retained
earnings.
Ireland Subsidiary
The Irish subsidiary is an autonomous company, operating in its own economic
environment without reliance on or interaction with the parent company or its
management. In an economic and operating sense, the Irish sub’s functional currency is
the Irish pound, and Elite’s investment in Ireland will be enhanced if the Irish pound
strengthens. Therefore, the economic exposure suggests that the current rate method of
translation should be used, with all exchange gains and losses for the current period
included in other comprehensive income and exchange gains and losses arising from
prior years included in accumulated other comprehensive income.
Since the Irish subsidiary represents a part of Elite’s diversified activities and since Elite
has control over the net assets of the Irish sub, the sub’s statements should be
consolidated with those of Elite, especially if the sub’s accounting policies are consistent
with those of Elite.
Other Issues
Consistency of accounting practices is a requirement for consolidation, as noted in the
above paragraph. When the subsidiary’s functional currency is the Canadian dollar , there
is no reason that the parent cannot require consistent practices. In a non-wholly owned
foreign subsidiary, however, it may not be possible or practical for the parent to insist on
the subsidiary’s using the same GAAP as the parent. Where foreign country GAAP is
used, the parent needs to convert the results of operations to the same GAAP as the
parent, especially when a Canadian company buys a going concern. In this case, it is
likely that both the Irish sub and the Canadian parent are using IFRS, therefore it is not
likely to be an issue here.

Reporting on the purchase basis will be required for Elite’s acquisition of 80% of the
Ireland company. Any fair value increments/decrements will have to be amortized. The
20% minority interest will be reported on the parent company basis, by showing 20% of
the book value of the subsidiary’s net assets as “non-controlling interest” on the equities
side of Elite’s consolidated balance sheet.
Segmented reporting will be appropriate for Elite if it has securities in the public markets
and if either export sales or the assets or revenues of the Irish subsidiary constitute 10%
of the consolidated amounts. Both geographic and business segments may be reportable,
since the Irish subsidiary is both in a foreign country and in a different line of business.
Case 9-3: Care Inc.
The objective of this case is to determine a subsidiary’s functional currency. Also,
students are required to describe the differences between the two translation methods.
This case is from the UFE Report 1994 and the following is the suggested approach for
the question. Note that the discussion is in terms of self-sustaining or integrated
subsidiary but the results are directly comparable to a discussion of a subsidiary with a
non-Canadian dollar functional currency and one with a Canadian dollar functional
currency.
Part 1
ShoeCo is a self-sustaining foreign operation of CI (i.e., ShoeCo’s functional currency is
the “foreign currency”) since it is financially and operationally independent of CI, the
reporting enterprise. This conclusion is based on the following factors:
- Cash flows of CI are insulated from the day-to-day activities of ShoeCo.
- Sales prices for most of ShoeCo’s products are determined by local
competition.
- The sales market for ShoeCo’s products is primarily outside of Canada.
- Labour, materials and other costs of ShoeCo’s products are primarily local
costs.
- The day-to-day activities of ShoeCo are financed primarily from its own
operations and local borrowing.
- There is very little interrelationship between the day-to-day activities of
ShoeCo management and those of CI.
- CI’s exposure is limited as the prices for its purchases are fixed in Canadian
dollars.

Part 2
Description of the Temporal Method
The temporal method translates assets, liabilities, revenues and expenses in a manner that
retains their bases of measurement in terms of the Canadian dollar, i.e. the Canadian
dollar is the unit of measure. The items are translated in the reporting enterprise in the
following manner:
- Monetary items are translated at the rate of exchange in effect at the balance
sheet date.
- Non-monetary items are translated at historical exchange rates, unless such
items are carried at fair value, in which case they are translated at the rate of
exchange in effect at the balance sheet date
- Revenue and expense items are translated at the rate of exchange in effect on
the dates they occur (average rate).
- Depreciation and amortization of assets translated at historical exchange rates
are translated at the same exchange rates as the assets to which they relate.
The determination of net income for the current period should include any exchange gain
or loss of the reporting enterprise that arises on translation or settlement of foreign-
currency-denominated monetary items or non-monetary items carried at fair value.
Description of the Current-rate Method
The current-rate method translates assets, liabilities, revenues and expenses in a manner
that retains their bases of measurement in terms of the foreign currency, i.e. the foreign
currency is the unit of measure. The items are translated in the reporting enterprise in the
following manner:
- Assets and liabilities are translated at the rate of exchange in effect at the
balance sheet date, and
- Revenue and expense items are translated at the rate of exchange in effect on
the dates on which such items are recognized in income during the period
(average rate).
Any exchange gains and losses arising from the translation of the financial statements of
a self-sustaining foreign operation are included in other comprehensive income, except
when the economic environment of the foreign operation is highly inflationary.

Conclusion
Since ShoeCo is a self-sustaining operation (i.e., ShoeCo’s functional currency is the
“foreign currency”), its financial statements should be translated using the current rate
method.
[CICA]
Case 9-4: Multi-Communications Ltd.
The objective of this case is to provide the students with a variety of issues, the
accounting and audit implications of which they need to explain. These issues include a
cumulative foreign exchange gain, investment in a country with high inflation, purchase
price adjustment and others. This case is a modified case from the UFE Report 1993 and
the following is the suggested approach for the question. Amendments have been made
for subsequent changes to GAAP.
Suggested Approach
Memo to: Mr. R. Allen, CFO
From: CA, Finance Director
Subject: Accounting and auditing issues for fiscal 20X8
As MCL is a public company, the auditors are aware that our main objective is to present
to investors the best possible picture of profits. However, the auditors may believe that
accounting policies chosen are too aggressive. The report that follows recommends and
seeks to justify the selection of accounting policies with reference to generally accepted
accounting principles (GAAP). The auditors will look at the substance of each transaction
before recommending an accounting treatment and will concentrate on unusual
transactions that have arisen this year. My report focuses on these transactions.
Change in Presentation Currency
In order to decide whether the change in presentation currency to US dollars should be
applied prospectively or retroactively, we first look to IAS 21. Unfortunately IAS 21 does
not address this issue. The change in presentation currency is similar to a change in
accounting policy and therefore guidance can be found in IAS 8. Under IAS 8, the
change should be implemented retrospectively unless it is impracticable.

Treatment in Current and Prior Years’ Financial Statements of Existing Cumulative
Gains from Foreign Exchange Arising from the US Operations
The cumulative foreign exchange gain consists of the common shares translated at the
historic rate, the retained earnings translated at the rate in effect each year, and the
balance of the accounts translated at the current rate. The question is how this cumulative
gain should be handled in the financial statements given that the presentation currency is
changing to the US dollar. Since IAS 21 is silent on how to treat changes in presentation
currency, we can look to IAS 8. If the financial statements are retroactively restated, then
to the extent that the gain arose from translating operations whose functional currency
was the US dollar, the present cumulative foreign exchange gain disappears. However to
the extent that operations existed whose functional currency was not the US dollar, but
another foreign currency, then a new cumulative exchange gain or loss will exist. In
addition, operations whose functional currency was the Canadian dollar (the previous
presentation currency) will also produce a cumulative exchange gain or loss on
restatement. In summary, the change in presentation currency will likely result in the
elimination of much of the current cumulative foreign exchange gain but will also result
in the creation of a new cumulative foreign exchange gain or loss.
Translation of Canadian Operations to US dollars in the Current Year
Since the financial statements will be prepared in US dollars, the Canadian operations
will have to be translated into US dollars. The current-rate method should be used.
The auditors will require full disclosure in the notes of the nature of the changes and their
impact on the financial statements. (Note that it is not clear whether the functional
currency of the parent has also changed. If it has, changes in functional currency are
accounted for prospectively.)
Investment in High Inflation Country
We must determine how to account for the South American company that we purchased
this year. The following two options are available:
1. Record the investment at cost. This method would benefit MCL because it does not
require MCL to recognize the losses expected in the early years. The investment
cannot, however, be recorded at cost if MCL has control over the company purchased.
It could be argued that the government's past record of instability would impede
MCL’s control over the company in the future. If the argument that the government is
unstable is made too strongly then the auditors may maintain that the value of the
investment has been impaired and require a write-down.
2. Consolidate the investment. The auditors will examine the facts to determine the
substance of the transaction. The conditions imposed by the government do not impede

MCL’s rights to the future economic benefits produced by the company. The
restrictions are very similar to those imposed by Canadian regulations (although
perhaps more restrictive) and do not appear to impede control. In addition, the
government is democratic and wishes to open up its borders. It is therefore unlikely the
government will do anything to tarnish its image and inhibit potential future
investment.
The auditors will look for evidence to determine whether MCL has effective control of its
investment. They will look at such factors as MCL’s control over dividend payments and
the appointment of the radio network’s board members and key executives. Even though
the government may have been unstable in the past, it appears to be stable now.
Therefore, the auditor will probably want MCL’s management to consolidate the new
company. The IFRS guidelines in IAS 29 should be used to determine if the country is a
“highly inflationary” economy. If it is, the financial statements will have to be adjusted
for changes in the price level of the country. The adjusted amounts will be translated
using the closing exchange rate for all amounts (including equity, revenues and
expenses).
Diversified Holdings (PH)
The purchase price of Peter Holdings (PH) must be allocated to the net assets acquired.
The longer the delay in making the allocation, the more likely it is that events in the
intervening period will have affected the values. Since the operations that have been sold
are spread out and not part of MCL’s core business, it is reasonable that the allocation
might take some time. IFRS 3 should be consulted to determine the appropriate
measurement period but this period cannot exceed one year.
The fact that the assets were purchased with the intention of disposing of some of them
affects the method of determining the value assigned to each asset. Any assets disposed
of will be valued at their net realizable value as opposed to their going concern value.
The auditors will require the values used to be substantiated.
The allocation of the purchase price is only an estimate and therefore the auditors will
accept the fact that the actual values may vary. The gain on sale of the hotel and
recreational property may have resulted from an inappropriate allocation of the purchase
price. If that is the case, some consideration should be given to adjusting goodwill or
some other asset on the balance sheet. Adjusting the goodwill balance will likely result in
a smoothing affect as goodwill is not amortized and only written down if impaired. MCL
may prefer this treatment.
The auditors may be concerned that income is overstated. However, if there is no
reasonable basis to arrive at a more appropriate allocation of the purchase price, then the
entire gain should be reflected in income of the period.

The auditors will want to know how MCL has accounted for the remaining non-
communication assets not yet disposed of. Few accounting alternatives are available.
These assets can be segregated on the balance sheet if there is a formal plan of disposal.
Otherwise, the assets will be recorded as part of continuing operations.
Internally Generated Intangibles
This year MCL has capitalized $60 million as intangibles. This is the appraised value of
internally generated intangibles, the costs of which have been expensed over the past ten
years.
There may be an argument for capitalizing the cost of subscription drives. The argument
hinges on whether the subscription drives are required in order to replace subscribers lost
due to normal attrition or whether such drives are a major effort undertaken only every
few years. If the cost arises annually, then it should not be capitalized as it is recurring.
However, if the cost increases the subscription base and this increase will last for more
than the current period, then capitalization may make sense. Since GAAP allows
companies to capitalize the cost of self-constructed assets, why not capitalize self-
generated intangibles? The answer is because IAS 38 specifically requires that
expenditures on advertising and promotion activities (i.e., “advertising, cold calls and
free products”) be expensed.
After initial recognition, IAS 38 allows for the use of the cost model or the revaluation
model. The use of the revaluation model for these intangibles is also unlikely. An active
market for the intangible assets must exist before the revaluation model can be used.
Because most intangibles are unique, it is highly unlikely that an active market exists.
Further, the existence of a recent purchase or sale of a similar intangible asset is not
evidence of an active market. The auditors are therefore unlikely to accept the use of an
appraised value as the basis for the valuation of intangibles. The use of appraisals is
generally restricted to tangible assets and in very specific circumstances.
Intangibles
Intangibles must be amortized. MCL should have amortized the intangibles in its
December 31, 20X7 financial statements.
There are two types of intangibles, those that are expected to provide benefit for a finite
period of time and those that are expected to provide benefit for an indefinite period of
time. Intangibles with an expected useful life that is finite are amortized over that period.
Intangibles with an indefinite life are not amortized but tested for impairment on an
annual basis. Since the licenses are expected to increase in value over time, an argument
can be made to not amortize them, with no impact on the income statement.
The auditors will want evidence that the expected cash flow stream, or expected future
benefit, from the licenses is indefinite. They will also require a valuation of the licenses
on an annual basis to test for impairment.

Fibre Optic Cables
MCL has invested in the installation of fibre optic cable. To satisfy MCL’s objective, the
cost of installation should be capitalized. The cost should be spread evenly to all 36
cables or to the six cables that MCL is currently using. Allocating the cost to the 36
cables installed will increase net income by reducing the cost of goods sold.
Purchasers of the cables must pay a monthly annual fee to cover their share of all
maintenance expenses. The fee can be recorded as revenue or can offset maintenance
expenses.
More information is required on the cables that are being leased to determine whether
they should be recorded as a capital or sales-type lease.
[CICA adapted]
Case 9-5: Johnson Co. Ltd.
Since the method used to translate a foreign operation can have a substantial impact on
the consolidated financial statements of the parent corporation, it is logical for the parent
to attempt to structure its foreign operations in such a way as to obtain the most desirable
financial statement impacts. This case focuses on that issue with a purely qualitative
approach.
Objectives of Financial Reporting
A major reporting objective of Johnston’s managers is to show steady growth in sales and
earnings. Future growth will be obtained through the U.S. market, and since the U.S.
market is much larger than the domestic Canadian market, the U.S. sales could eventually
be larger than the Canadian sales. The translation method should therefore not cause high
or unexpected volatility due to exchange rate changes.
Another objective is management evaluation. Johnston’s financial reporting is most likely
International GAAP, since its shares are traded on the TSX.
Proposal 1 — Sales Offices
Because orders would be filled from Canadian warehouses, the sales offices would be
merely distribution centres and would be deemed to have the same functional currency as
the parent. Therefore, the temporal method of foreign currency translation would be
applicable. That is, at the transaction date for a sale, expense incurrence, etc., the amount
would be translated at the exchange rate in effect at that time. At the balance sheet date,
assets and liabilities such as receivables and payables would be translated at the exchange

rate in effect then. The volume of receivables would likely be much higher than U.S.
payables for expenses such as salaries and rent. Thus, if there are fluctuations in the
exchange rate over the period, there will be a net exchange gain or loss which must be
included in income for the same period. Earnings may be quite volatile due to exchange
rate changes over which the company has no control.
Proposal 2 — Subsidiary
The financial statements of the subsidiary will be translated before being consolidated
with those of Johnston. The translation process will likely produce an exchange gain or
loss, the treatment of which will depend on the functional currency of the subsidiary.
This classification indicates the exposure of Johnston to exchange rate changes. Some
criteria used to determine the classification are:
1. The currency that influences the selling prices for its goods and services. IFRS
note that this will often be the currency in which prices are denominated and
settled.
2. The currency of the country whose competitive forces and regulations determine
the selling prices for its goods and services.
3. The currency that influences its costs of providing goods and services. IFRS note
that this will often be the currency in which these costs are denominated and
settled.
If the functional currency is not easily determined from the primary factors above,
management of a company should also consider the following factors in determining
its functional currency.
4. The currency in which financing activities are conducted. This would encompass
the issuing of debt and selling of shares.
5. The currency in which cash from operating activities is kept.
6. Whether the activities of the foreign operation are conducted independently of the
parent or as an extension of the parent.
7. Whether the foreign operation conducts a low or high proportion of its activities
with the parent.
8. Whether the cash flows of the foreign operation directly affect the cash flows of
the parent and are readily available to the parent.
9. Whether the cash flows of the foreign operation are sufficient to service its debt
obligations without the need for funds from the parent.
Canadian Dollar as Functional Currency
If the subsidiary has the Canadian dollar as the functional currency, then the financial
statements will be translated using the temporal method.

This means that the effect of a change in the exchange rate will be the same for Johnston
as if it had undertaken the subsidiary’s transactions itself. Exchange gains or losses will
be included in income for the period except for portions included in income of previous
periods. This would produce potentially volatile earnings.
U.S. Dollar as Functional Currency
If the subsidiary has the US dollar as the functional currency, then the financial
statements will be translated using the current-rate method. In this case, Johnston’s
exposure to exchange rate changes would be limited to its net investment in the
subsidiary. Assets and liabilities will be translated at the rate of exchange in effect at the
balance sheet date. Revenue and expense items will be translated at the rate of exchange
in effect on the dates on which the items are recognized in income of the subsidiary. An
exchange gain or loss will arise when the exchange rate changes. However, under this
method, the gain or loss for the current period will be included in other comprehensive
income of Johnston and accumulated gains and losses will be included in accumulated
other comprehensive income. This will produce less volatility in earnings than the
temporal method.
Recommendation
The current-rate method appears to be most desirable to satisfy the company’s objective
of a steady growth in earnings. Thus, a subsidiary should be established in such a manner
that the US dollar is the functional currency. This means that the operations should be as
independent as possible from those of Johnston. Financing the subsidiary in the United
States and servicing the debt with the subsidiary’s earnings will make a US dollar
functional currency classification appear reasonable as well as being advantageous
because of the exchange gain or loss deferral.
[SMA, adapted]
Case 9-6: Buy Cartier Ltd.
The objective of this case is to provide the students with a variety of issues, the
accounting and audit implications of which they need to explain. The main issues include
the acquisition of subsidiaries, a change in presentation currency, pre-operating costs and
government subsidies.
This case is from The Institute of Chartered Accountants of Ontario’s 2002 Practice
Exam Two and the following is the suggested approach (adapted for subsequent changes
to GAAP).
Report to Mr. Butler Regarding Buying Cartier Ltd. (BCL)

Overview
Past disagreements with the auditors indicate that the auditors may have concerns about
aggressive accounting policies. BCL’s objectives are to present high earnings and a
favourable financial position and to meet the publicized objectives to double revenues
within 5 years. My approach in the following analysis is to attempt to meet BCL’s
objectives within the constraints of GAAP.
Materiality and Audit Fees
The auditors’ objective is to determine and report the substance of transactions. Their
concern will be with material, unusual transactions. Acquisitions during the year and
reliance on other auditors for material subsidiaries will increase audit risk. We should
expect that the auditors will increase their level of testing, which will increase audit fees.
Acquisition of Alltrans
Management bonuses should be examined to determine if they should be considered a
cost of the business combination. IFRS 3 provides guidelines to help determine if
contingent consideration like bonuses is part of the cost of the combination or
remuneration to employees. I recommend that they be expensed in the year paid as it
appears that the bonuses should be treated as remuneration for the following reasons: (1)
the bonuses are based on key members of management continuing their employment; (2)
the employment period is for the same length as the bonus payments; and (3) the bonus
payments are based on a percentage of operating results.
The purchase price discrepancy is –$18M (that is, US$42.2M + $20M goodwill –$80.2M
deferred income taxes). We need to determine fair values of tangible and intangible net
assets. The value of the inner-city bus contract may be considered an intangible asset and
therefore subject to amortization and the annual test for impairment. The excess cost of
the purchase over the fair value of identifiable tangible and intangible assets should be
recorded as goodwill. If there is no excess it creates negative goodwill. We would prefer
to maximize the amount of the purchase price discrepancy allocated to goodwill, as
goodwill is not amortized. It meets our objective of presenting high earnings and a
favourable financial position. Goodwill is subject to an annual check for impairment and
negative goodwill is recognized as a gain on bargain purchase in the consolidated SCI in
the year of purchase. The auditors will require evidence to support fair values and
allocation of purchase price.
BCL should consolidate post acquisition operations of Alltrans for the period May and
June 20X5. The auditors will require an audit or review of the transactions for the stub
period from July to September to determine if any significant transactions need be
accounted for or disclosed. They will also do a subsequent events review up to the date of
the audit report on BCL. Our financial statements will need to disclose the non-
coterminous year-ends of BCL and Alltrans.

The accounting policies of Alltrans will need to conform to IFRS for consolidation. The
auditors will need to perform procedures to determine if reliance on Alltrans auditors is
warranted. This will increase the audit fees as R&R will likely want to review the
auditors’ working papers.
Change in Presentation Currency
The change in presentation currency is the result of the Alltrans acquisition. In order to
decide whether the change in presentation currency to US dollars should be applied
prospectively or retroactively, we first look to IAS 21. Unfortunately IAS 21 does not
address this issue. The change in presentation currency is similar to a change in
accounting policy and therefore guidance can be found in IAS 8. Under IAS 8, the
change should be implemented retrospectively unless it is impracticable.
Treatment in current and prior years’ financial statements of existing cumulative gains
from foreign exchange arising from the US operations
The question is how the cumulative foreign exchange gain of $16 million should be
handled in the financial statements given that the presentation currency is changing to the
US dollar. Since IAS 21 is silent on how to treat changes in presentation currency, we
can look to IAS 8. Under IAS 8 the financial statements are retroactively restated. Given
the gain arose from translating operations whose functional currency was the US dollar,
the present cumulative foreign exchange gain disappears. However to the extent that
operations existed whose functional currency was not the US dollar, but another foreign
currency, then a new cumulative exchange gain or loss will exist. In addition, operations
whose functional currency was the Canadian dollar (the previous presentation currency)
will also produce a cumulative exchange gain or loss on restatement. In summary, the
change in presentation currency will likely result in the elimination of much of the
current cumulative foreign exchange gain but will also result in the creation of a new
cumulative foreign exchange gain or loss.
Translation of Canadian Operations to US dollars in the Current Year
Since the financial statements will be prepared in US dollars, the Canadian operations
will have to be translated into US dollars. The functional currency of the Canadian
operations is the Canadian dollar based on the fact that corporate management decision-
making is based in Canada. The current-rate method should be used. A foreign exchange
exposure and a new cumulative foreign exchange gain/loss will result. It should be
classified separately in equity (as part of accumulated other comprehensive income). The
current year gain or loss will be included in other comprehensive income.
The auditors will require full disclosure of the nature and effect of the change in the
presentation currency on the financial statements. (Note that it is not clear whether the
functional currency of the parent has also changed. If it has, changes in functional
currency are accounted for prospectively.)

Investment in Transcom SA
Pursuant to the provisions of IAS 16, start-up costs cannot be capitalized.
A decision is needed on whether to consolidate the subsidiary or to account for it using
the cost or equity method. The cost method may be appropriate given that BCL may not
have control over the subsidiary operations as the government’s approval of designs is
required and the government will regulate rates and schedules. However, even if BCL
does not have control, the equity method of accounting may be appropriate as BCL may
exercise significant influence over the subsidiary as Transcom is using BCL’s engineers
and designs. Consolidation may be appropriate as the government involvement does not
impede rights to future economic benefits and BCL bears the risks associated with the
foreign operation. The government’s on-going involvement is similar to the role of
Canadian regulatory authorities.
I recommend that we consolidate Transcom. The facts support consolidation to comply
with GAAP and presenting consolidated statements would meet the objectives of
presenting high earnings and a strong financial position. If we consolidate, we will need
to determine the functional currency of Transcom SA.
An argument can be made that the functional currency is the Canadian dollar and is
supported by the fact that BCL management and Canadian engineers are involved in the
daily operations of the subsidiary. The temporal method will result in the inclusion of
unhedged exchange gains/losses in the determination of income.
The argument that the Peruvian soles is the functional curency is supported by the fact
that involvement of BCL personnel at the start-up phase does not mean that future
operations will be mandated by BCL. Services are provided and revenues determined
locally in a rate-regulated environment. The conditions of the government subsidy
indicate a heavy local employee component. The current-rate method will result in the
inclusion of foreign exchange gains and losses in other comprehensive income.
The IFRS guidelines in IAS 29 should be used to determine if Peru is a “highly
inflationary” economy. If it is, the financial statements will have to be adjusted for
changes in the price level of the country. The adjusted amounts will be translated using
the closing exchange rate for all amounts (including equity, revenues and expenses).
In order to determine the appropriate treatment, the auditors will require further
information on cash flows and financing plans. From BCL’s perspective, consolidating
the operation is preferable as we anticipate that the subsidiary will be profitable, and our
objective of presenting high earnings and a strong financial position is met.
Government subsidies should be recorded as a reduction of the cost of transit equipment
or deferred and amortized over the same period as the transit equipment. Conditions
associated with the repayment of subsidies should be disclosed. The auditors will require
evidence to support compliance with the terms of the subsidy. We will need to discuss

with the auditors the most cost effective way of obtaining audit evidence at September
30, 20X5.
SOLUTIONS TO PROBLEMS
P9-1
a. Translated statements of financial position:
(I) Current rate (II) Temporal
Cash H 40,000 @$1.60 $64,000 @$1.60 $64,000
Accounts receivable 20,000 @$1.60 32,000 @$1.60 32,000
Inventory (at market) 120,000 @$1.60 192,000 @$1.60 192,000
Capital assets 400,000 @$1.60 640,000 @$1.30 520,000
Accumulated
depreciation
(160,000) @$1.60 (256,000) @$1.30 (208,000)
Long-term note
receivable
100,000 @$1.60 160,000 @$1.60 160,000
Total assets H520,000 $832,000 $760,000
Accounts and notes
payable
H80,000 @$1.60 $128,000 @$1.60 $128,000
Bonds payable 300,000 @$1.60 480,000 @$1.60 480,000
Common shares 140,000 @$1.10 154,000 @$1.10 154,000
Cumulative translation
gain (loss)
70,000 (2,000)
Total equities H520,000 $832,000 $760,000
b.
I) Accounting exposure:
Net amounts translated at current rate =
H 140,000 Dr.
net assets
H 100,000 Cr.
net liabilities
II) Additional gain or loss from an
increase $35,000 gain $25,000 loss

P9-2
(a) (b)
Current rate Temporal method
@ $0.82 rates amount
Sales $2,460,000 $0.82 $2,460,000
Cost of goods sold:
Beginning inventory 164,000 0.74 148,000
Purchases 820,000 0.82 820,000
984,000 968,000
Ending inventory 328,000 0.85 340,000
656,000 628,000
Depreciation 246,000 0.62 186,000
Other operating expenses 738,000 0.82 738,000
Interest expense 164,000 0.82 164,000
Total expenses 1,804,000 1,716,000
Net income (before exchange
gains or losses) $ 656,000 $ 744,000
Note: The interest, like all expenses, is translated at the rate in effect when the expense is
incurred, rather than when it is paid.
P9-3
a. (I) Functional Currency is the Canadian dollar
Loss on monetary items—bond (to net income):
Exchange Translated
Nominal Rates Amounts
Opening €9,000,000 1.20 $10,800,000
Closing 9,000,000 1.65 14,850,000
Current year’s loss $ 1,050,000
Translated Financial Statements
Statement of Comprehensive Income
Year ended December 31, 20X5
Exchange Translated
Nominal Rates Amounts
Revenue €1,000,000 1.40
Expenses:
Interest expense 990,000 1.40
Other expense 10,000 1.40

Monetary loss — see above 4,050,000
1,000,000 5,450,000
Income (loss) € 0 $(4,050,000)
Statement of Financial Position
December 31, 20X5
Cash — —
Land €12,000,000 1.20 $14,400,000
$14,400,000
Bond €9,000,000 1.65 $14,850,000
Common shares 3,000,000 1.20 3,600,000
Retained earnings (deficit) — (4,050,000)
$14,400,000
a. (II) Functional Currency is the Euro
Translation Gain on Net Assets (to other comprehensive income)
Exchange Translated
Nominal Rate Amounts
Net assets, opening €3,000,000 1.20 $3,600,000
closing 3,000,000 1.65 4,950,000
Exchange gain $1,350,000
Translated Financial Statements
Exchange Translated
Nominal Rate Amounts
Revenue €1,000,000 1.40 $1,400,000
Expenses:
Interest expense 990,000 1.40 1,386,000
Other expense 10,000 1.40 14,000

€1,000,000 1,400,000
Income € 0 $ 0
Statement of financial position
December 31, 20X5
Cash —
Land 12,000,000 1.65 $19,800,000
$19,800,000
Bond 9,000,000 1.65 $14,850,000
Common shares 3,000,000 1.20 3,600,000
Translation gain/loss* see above 1,350,000
$19,800,000
* Reported as a separate component of shareholder’s equity under ASPE, or in
Other Comprehensive Income under IFRS.
b. Economic exposure is the impact of changes in the relative values of the currencies on
the earnings ability of the foreign subsidiary. The foreign debt is hedged by the
foreign non-monetary land investment if Euro proceeds from the sale of the land in
five years are adequate to pay off the Euro debt. Therefore, reflecting an exchange loss
on the bond (temporal method) does not reflect economic exposure.
The current-rate method better reflects economic exposure. Investco Ltd. is exposed to
the extent of its net asset investment (€ 3,000,000 at historic values) and in fact
enjoyed favourable unrealized exchange gains on this investment during 20X5, a year
during which the Canadian dollar was depreciating relative to the Euro.
c. According to IFRS, the German subsidiary’s functional currency is the Euro because:
• there is no interrelationship between the day-to-day activities of the German
subsidiary and the Canadian parent
• the activities of the German subsidiary are financed by debt and rental inflows
denominated in the Euro
• the Euro debt will be repaid out of Euro proceeds from the sale of the land in five
years.
In effect, there is no exposure of the Canadian parent to short-term fluctuations in the
Euro exchange rate and it would be inappropriate to include unrealized foreign
exchange gains or losses in the Canadian parent’s income for each of the five years.
Therefore, the current-rate method would be required.
P9-4
a.
(I) Equipment (₤7,500 × 1.40) $ 10,500

(II) Accumulated amortization
1st
purchase (₤3,000/10 × 2 × 1.40) $ 840
2nd
purchase (₤4,500/10 × 1.40) 630
Total 1,470
(III) Amortization expense
[(₤3,000/10 + ₤4,500/10) × 1.47] $ 1,103
b.
(I) Equipment
1st
purchase (₤3,000 × 1.55) $ 4,650
2nd
purchase (₤4,500 × 1.63) 7,335
Total $11,985
(II) Accumulated amortization
1st
purchase (₤3,000/10 × 2 × 1.55) $ 930
2nd
purchase (₤4,500/10 × 1.63) 734
Total $ 1,664

P9-5
a.
Maple Limited
December 31, 20X9
(Canadian dollars)
Cash (US$100,000 × 1.40) $ 140,000
Accounts receivable (US$200,000 × 1.40) 280,000
Inventory [(US$180,000 × 1.38) + (US$120,000 × 1.35)] 410,400
Equipment—net (US$1,100,000 × 1.17) 1,287,000
$2,117,400
Accounts payable (US$250,000 × 1.40) $ 350,000
Bonds payable (US$700,000 × 1.40) 980,000
Common shares (US$100,000 × 1.17) 117,000
Retained earnings (to balance) 670,400
$2,117,400
b. Bonds payable, end of year (US$700,000 × 1.40) $980,000
Bonds payable, beginning of year
(US$700,000 × 1.31) 917,000
Exchange loss $ 63,000
c. Items subject to exchange rate exposure (= shareholders’ equity):
US$ Rate C$
Beginning $ 710,000 1.31 $ 930,100
Net income 200,000 1.34 268,000
Dividends (160,000) 1.36 (217,600)
Calculated 980,500
Actual $ 750,000 1.40 1,050,000
Exchange gain (credit to cumulative translation adjustment) $ 69,500
d. No, this is not a valid statement. The capital assets are reported at historical cost less
accumulated amortization in the US dollar balance sheet. When a historical cost in
US dollars is multiplied by a current rate, the resulting amount is not a current value
of the capital asset in Canadian dollars. To get a current value in Canadian dollars, the
current value in US dollars of the capital assets is multiplied by the current rate.
[CGA]

P9-6
a. Translation of Financial Statements by Current-Rate Method, 20X5
Calculation of financial statement
translation gain
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Net assets, January 1, 20X5 195,000 0.94 183,300
Add: Net Income 150,000 0.99 148,500
Less: Dividends (70,000) 0.98 (68,600)
Derived balance 263,200
Net assets, December 31, 20X5 275,000 1.02 280,500
Translation gain for 20X5 17,300
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Sales 500,000 0.99 495,000
Cost of goods sold 280,000 0.99 277,200
Gross profit 220,000 217,800
Amortization expense 50,000 0.99 49,500
Other expenses 20,000 0.99 19,800
Income 150,000 148,500
20X5 Translation Gain 17,300
At December 31, 20X5
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Cash 120,000 1.02 122,400
Accounts receivable 85,000 1.02 86,700
Inventory 80,000 1.02 81,600
Equipment, net 250,000 1.02 255,000
535,000 545,700
Accounts payable 60,000 1.02 61,200
Bonds payable 200,000 1.02 204,000
Common shares 100,000 0.94 94,000
Retained earnings 175,000 Calculated* 169,200
535,000 528,400
Cumulative Translation Gain 17,300
*Calculation of retained earnings

Beginning retained earnings, 20X5 95,000 0.94 89,300
Add: Net Income 150,000 0.99 148,500
Less: Dividends (70,000) 0.98 (68,600)
Ending retained earnings, 20X5 175,000 169,200
Calculation of translation gain/loss on FVIs
Beginning goodwill [(200 ÷ 0.80) – 195) 55,000 0.94 51,700
Impairment during year none -
Derived value 51,700
Ending goodwill 55,000 1.02 56,100
Translation gain 4,400
b. Translation of Financial Statements by Temporal Method, 20X5
translation loss
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Net monetary liabilities, January 1, 20X5 (165,000) 0.94 (155,100)
Add: Sales 500,000 0.99 495,000
Less: Purchases (280+80-60) 300,000 0.99 (297,000)
Less: Other expenses 20,000 0.99 (19,800)
Less: Dividends (70,000) 0.98 (68,600)
Derived balance (45,500)
Net monetary liabilities, December 31,
20X5
(55,000)
1.02
(56,100)
Translation loss for 20X5 (10,600)
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Sales 500,000 0.99 495,000
Purchases 300,000 0.99 297,000
Ending inventory (80,000) 1.00 (80,000)
Cost of goods sold 280,000 273,400
Gross profit 220,000 221,600
Other expenses 20,000 0.99 19,800
Income 150,000 154,800
20X5 Translation Loss (include in
consolidated income)
(10,600)

Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Cash 120,000 1.02 122,400
Inventory 80,000 1.00 80,000
Equipment, net 250,000 0.94 235,000
535,000 524,100
Bonds payable 200,000 1.02 204,000
Common shares 100,000 0.94 94,000
535,000 534,700
Cumulative Translation Loss (include in
consolidated R.E.)
(10,600)
Add: Net Income 150,000 See above 154,800
Less: Dividends (70,000) 0.98 (68,600)
P9-7
a. It appears that the functional currency of Soul’s operations is the Swiss Franc,
based on the following:
• Inventory is purchased from suppliers in Switzerland.
• Sales prices are largely immune to changes in exchange rates.
• Sales prices are determined largely by local competition.
b. Translation of Financial Statements by Temporal Method, 20X15
translation loss
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Net monetary liabilities, January 1, 20X15 (95,000) 0.86 (81,700)
Add: Sales 850,000 0.91 773,500
Less: Purchases (500+110-80) (530,000) 0.91 (482,300)

Less: Other expenses (245,000) 0.91 (222,950)
Less: Dividends (30,000) 0.94 (28,200)
Derived balance (41,650)
Net monetary liabilities, December 31,
20X15
(50,000)
0.96
(48,000)
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Sales 850,000 0.91 773,500
Purchases 530,000 0.91 482,300
Ending inventory (110,000) 0.95 (104,500)
Cost of goods sold 500,000 446,600
Gross profit 350,000 326,900
Other expenses 245,000 0.91 222,950
Income 75,000 78,150
20X15 Translation Loss (include in
consolidated income)
(6,350)
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Cash 80,000 0.96 76,800
Inventory 110,000 0.95 104,500
Equipment, net 250,000 0.86 215,000
580,000 530,700
Bonds payable 120,000 0.96 115,200
Common shares 140,000 0.86 120,400
580,000 537,050
Cumulative Translation Loss (include in
consolidated R.E.)
(6,350)
Add: Net Income 75,000 See above 78,150

Less: Dividends (30,000) 0.94 (28,200)
c. Translation of Financial Statements by Current-Rate Method, 20X15
translation gain
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Net assets, January 1, 20X15 265,000 0.86 227,900
Add: Net Income 75,000 0.91 68,250
Less: Dividends (30,000) 0.94 (28,200)
Net assets, December 31, 20X15 310,000 0.96 297,600
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Sales 850,000 0.91 773,500
Cost of goods sold 500,000 0.91 455,000
Gross profit 350,000 318,500
Other expenses 245,000 0.91 222,950
Income 75,000 68,250
20X15 Translation Gain 29,650
Local
Currency
(SF)
Exchange
Rate
Translated
Amounts
(C$)
Cash 80,000 0.96 76,800
Inventory 110,000 0.96 105,600
Equipment, net 250,000 0.96 240,000
580,000 556,800
Bonds payable 120,000 0.96 115,200
Common shares 140,000 0.86 120,400

580,000 527,150
Cumulative Translation Gain 29,650
Add: Net Income 75,000 0.91 68,250
Less: Dividends (30,000) 0.94 (28,200)
Calculation of translation gain/loss on FVIs
Beginning goodwill [(300 – 265) 35,000 0.86 30,100
Impairment during year none -
Derived value 30,100
Ending goodwill 35,000 0.96 33,600
Translation gain 3,500
[CGA]
P9-8
a.
SJC Ltd.
Translated Statement of Comprehensive Income
US$
Exchange
Rate C$
Sales 5,000,000 1.25 6,250,000
Opening inventory 1,800,000 1.20 2,160,000
Purchases 3,500,000 1.25 4,375,000
Goods available 5,300,000 6,535,000
Closing inventory (2,100,000) 1.28 (2,688,000)
Cost of goods sold 3,200,000 3,847,000
2,403,000
Bond interest expense 240,000 1.25 300,000
Other expenses 470,000 1.25 587,500
Foreign exchange loss (1) 167,000
Net income 740,000 928,500
Notes:
(1) Calculation of Foreign Exchange Loss:
US$
Exchange
Rate C$
Net monetary position, (2,050,000) (2,460,000

December 31, 20X5 (2) 1.20 )
Changes during 20X6
Sales 5,000,000 1.25 6,250,000
Purchases (3,500,000) 1.25 (4,375,000)
Bond interest expense (240,000) 1.25 (300,000)
Other expenses (470,000) 1.25 (587,500)
Dividends (50,000) 1.27 (63,500)
Plant and equipment (600,000) 1.30 (780,000)
Net changes 140,000 144,000
Calculated net monetary position,
December 31, 20X6 (2,316,000)
Actual net monetary position,
December 31, 20X6 (1,910,000) (3) 1.30 (2,483,000)
Foreign exchange loss, 20X6 (167,000)
(2) $250,000 + $1,100,000 – $400,000 – $3,000,000 = $(2,050,000)
(3) $300,000 + $1,350,000 – $560,000 – $3,000,000 = $(1,910,000)
b.
(I) Accounts receivable
$1,350,000 × $1.30 = $1,755,000
(II) Plant and equipment (net)
US$ (3,000,000 – 250,000 – 100,000) (1.20) + US$600,000 (1.30) =
C$3,960,000
(III) Bonds payable
US$3,000,000 × 1.30 = C$3,900,000
c.
(I) Plant and equipment
US$3,250,000 × 1.30 = $4,225,000
(II) Common shares
US$1,500,000 × 1.20 = $1,800,000
(III) Retained earnings
Opening retained earnings (US$1,250,000 × 1.20) = $1,500,000
Net income (US$740,000 × 1.25) = 925,000
Dividends (US$(50,000) × 1.27) = (63,500)
$2,361,500

d.
Calculation of translation gain on FVIs Local
Currency
(US $)
Exchange
Rate
Translated
Amounts
(C$)
FVIs, January 1, 20X6 [(5,000÷0.8) – 2,750] 3,500,000 1.20 4,200,000
Less: Amortization on patents (1,000 ÷ 5yrs) 200,000 1.25 (250,000)
Derived balance 3,950,000
FVIs, December 31, 20X6 3,300,000 1.30 4,290,000
e. Questions that could be asked about the operation of SJC to help establish its
functional currency include:
1. What is the currency that influences the selling prices for its goods and
services? (IFRS note that this will often be the currency in which prices
are denominated and settled.)
2. What is the currency of the country whose competitive forces and
regulations determine the selling prices for its goods and services?
3. What is the currency that influences its costs of providing goods and
services? (IFRS note that this will often be the currency in which these
costs are denominated and settled.)
[CGA]
P9-9
a.
Port should translate SuperSpan’s financial statements into Canadian dollars using the
temporal method. Two facts that support this conclusion are:
• SuperSpan makes its sales based on prices determined by the worldwide market.
• SuperSpan imports a significant amount of wood from Canadian timber firms.
b. Current-rate Method
Calculation of translation loss Local Currency
(€)
Exchange
rate
Translated
amounts (C $)
Net Assets Jan 1, 20X7 700,000 1.45 1,015,000
Add: Net Income for 20X7 120,000 1.42 170,400
Less: Dividends for 20X7 (40,000) 1.41 (56,400)

Add: Additional shares issued in 20X7 400,000 1.44 576,000
Actual balance 1,180,000 1.40 1,652,000
Translation loss for 20X7 53,000
Sales 2,100,000 1.42 2,982,000
Cost of goods sold 1,600,000 1.42 2,272,000
Gross Profit 500,000 710,000
Selling and administrative 145,000 1.42 205,900
Amortization 125,000 1.42 177,500
Income before income taxes 200,000 284,000
Income taxes 80,000 1.42 113,600
Net income in 20X7 120,000 170,400
Translation loss for 20X7(include in consolidated OCI) (53,000)
Cash 300,000 1.40 420,000
Inventory 500,000 1.40 700,000
Equipment, net 575,000 1.40 805,000
1,725,000 2,415,000
Bonds payable 400,000 1.40 560,000
Common shares (1) 900,000 1,336,000
Cumulative OCI (2) (99,000)
Retained earnings (3) 280,000 415,000
1,725,000 2,415,000
(1) Common shares
Original shares 500,000 1.52 760,000
Shares issued in 20X7 400,000 1.44 576,000
1,336,000
(2) Calculation of cumulative translation loss
Net Assets Jan 1, 20X6 (700 – 150) 550,000 1.52 836,000
Add: Net Income for 20X6 150,000 1.50 225,000

Less: Dividends for 20X6 0 0
Actual balance 700,000 1.45 1,015,000
Translation loss for 20X7 above (53,000)
Cumulative translation loss (99,000)
(3) Retained earnings
Retained earnings January 1, 20X6 (200 – 150) 50,000 1.52 76,000
Add: Net income 20X6 150,000 1.50 225,000
Retained earnings December 31, 20X6 200,000 301,000
Add: Net income 20X7 120,000 1.42 170,400
Less: Dividends 20X7 (40,000) 1.41 (56,400)
c. Temporal Method
Calculation of translation loss Local Currency
(€)
Exchange
rate
Translated
amounts (C $)
Monetary Items:
Balance January 1, 20X7 (250+325-200-400) (25,000) 1.45 (36,250)
Changes during 20X7:
Sales revenue 2,100,000 1.42 2,982,000
Inventory purchases (1,600+500-425) (1,675,000) 1.42 (2,378,500)
Selling and administrative (145,000) 1.42 (205,900)
Bond interest expense (30,000) 1.42 (42,600)
Income tax expense (80,000) 1.42 (113,600)
Dividends paid (40,000) 1.41 (56,400)
Issue of common shares 400,000 1.44 576,000
Purchase of equipment (400,000) 1.44 (576,000)
Balance Dec 31, 20X7(300+350-145-400) 105,000 1.40 147,000
Net translation loss for 20X7 1,750

Sales 2,100,000 1.42 2,982,000
Cost of goods sold (1) 1,600,000 2,292,500
Gross Profit 500,000 689,500
Selling and administrative 145,000 1.42 205,900
Amortization (2) 125,000 188,000
Income before income taxes 200,000 253,000
Income taxes 80,000 1.42 113,600
Net income in 20X7 120,000 137,650
Cash 300,000 1.40 420,000
Inventory 500,000 1.43 715,000
Equipment, net (3) 575,000 844,000
1,725,000 2,469,000
Bonds payable 400,000 1.40 560,000
Common shares (4) 900,000 1,336,000
Retained earnings (5) (includes translation losses) 280,000 370,000
1,725,000 2,469,000
(1) Cost of goods sold
Opening inventory 425,000 1.48 629,000
Purchases 1,675,000 1.42 2,378,500
Closing inventory 500,000 1.43 715,000
Cost of goods sold 3,200,000 2,292,500
(2) Amortization expense
Acquired 20X1 100,000 1.52 152,000
Acquired 20X7 25,000 1.44 36,000
188,000
(3) Equipment net, calculation
New equipment [400 – (400 ÷ 8 × .5)] 375,000 1.44 540,000
Old equipment (575 – 375) 200,000 1.52 304,000
844,000

(4) Common shares
Original shares 500,000 1.52 760,000
Shares issued in 20X7 400,000 1.44 576,000
1,336,000
(5) Retained earnings
Retained earnings January 1, 20X6 (200 – 150) 50,000 1.52 76,000
Add: Net income 20X6 (plug to balance) 150,000 (plug) 212,750
Add: Net income 20X7 120,000 Above 137,650
Less: Dividends 20X7 (40,000) 1.41 (56,400)
[CGA]
P9-10
a.
Calculation of net exchange gain / loss for 20X2—Temporal method
P Rate CDN$
Net monetary items:
Opening balance 5,000,000 0.10 $ 500,000
Revenues 3,200,000 0.12 384,000
Operating expenses (2,200,000) 0.12 (264,000)
Capital assets (4,900,000) 0.11 (539,000)
Dividends (200,000) 0.13 (26,000)
Actual balance, December 31, 20X2 900,000 0.14 126,000
Net exchange gain for 20X2 $ 71,000
Calculation of cumulative exchange gain—current-rate method
Analysis of change in net assets:
p 5,000,000 January 2, 20X2 (0.14-0.10) $ 200,000
700,000 Net income (0.14-0.12) 14,000
(200,000) Dividends (0.14-0.13) (2,000)
p 5,500,000 Cumulative exchange gain $ 212,000
An alternative calculation is as follows:
P Rate CDN$
Net assets:
Opening balance 5,000,000 0.10 $ 500,000
Add: Net income 700,000 0.12 84,000
Less: Dividends (200,000) 0.13 (26,000)

Actual balance, December 31, 20X2 5,500,000 0.14 770,000
Cumulative exchange gain for 20X2 $ 212,000
b.
GC Company
Year Ended December 31, 20X2
(i) (ii)
(f.c. = peso) (f.c. =
Cdn $)
Current-rate
Temporal
(Dr) Cr: P Rate CDN $ Rate CDN $
Revenues 3,200,000 0.12 384,000 0.12
384,000
Amortization expense (300,000) 0.12 (36,000) 0.11
(33,000)
Operating expenses (2,200,000) 0.12 (264,000) 0.12
(264,000)
Exchange gain (loss) (note 1) 71,000
Total expenses (2,500,000) (300,000) (226,000)
Net income 700,000 84,000 158,000
Note 1: Gain on monetary items—see above
GC Company
December 31, 20X2
(f.c. = peso) (f.c. = C$)
Current-rate Temporal
(Dr.) Cr. P Rate C$ Rate C$
Current monetary items 2,800,000 0.14
0.14 392,000
Capital assets 4,900,000 0.14
0.11 539,000
Accumulated amortization (300,000) 0.14
0.11 (33,000)
Total assets 7,400,000 1,036,000 898,000

(Dr.) Cr.
Current monetary liabilities 900,000 0.14
0.14 126,000
Long-term debt 1,000,000 0.14
0.14 140,000
Common shares 5,000,000 0.10
0.10 500,000
Retained earnings 700,000 0.12
— 158,000
Less: dividends (200,000) 0.13
0.13 (26,000)
OCI-Cumulative exchange gain 212,000 —
Total equities 7,400,000 1,036,000 898,000
[CGA]
P9-11
20X7 20X6
Accounts receivable—translated at the
current rate at each year-end:
42,200 LCU/1.6 $26,375
37,000 LCU/1.8 $20,556
Less allowance for uncollectible accounts:
2,200 LCU/1.6 (1,375)
2,000 LCU/1.8 (1,111)
$25,000 $19,445
Inventories—translated at date of purchase:
80,000 LCU/1.8 (June 20X7) $44,444
75,000 LCU/2.1 (June 20X6) $35,714
Capital assets— translated at date of purchase:
24,000 LCU/2.1 (January 1, 20X6) $11,429 $11,429
140,000 LCU/2.1 (January 1, 20X6) 66,667 66,667
30,000 LCU/1.6 (July 1, 20X7) 18,750 —
96,846 78,096
Less accumulated depreciation:
14,000 LCU/2.1 (for 20X6) (6,667) (6,667)
14,000 LCU/2.1 (for 20X7) (6,667)
3,000 LCU/1.6 (for 20X7) (1,875) —
$81,637 $71,429

Long-term debt—translated at the current rate:
100,000 LCU/1.6 $62,500
120,000 LCU/1.8 $66,667
Common shares—translated at historical rate:
50,000 LCU/2.1 $23,810 $23,810

P9-12
Note: The statement of comprehensive income is in the solution to P9-2.
a. Statements of financial position, current-rate method:
20X3 20X2
Cash $0.87 $ 174,000 $0.77 $ 385,000
Accounts receivable 0.87 348,000 0.77 231,000
Inventory 0.87 348,000 0.77 154,000
Land 0.87 435,000
Equipment (net) 0.87 1,479,000 0.77 1,540,000
$2,784,000 $2,310,000
Accounts payable 0.87 $ 435,000 0.77 $ 308,000
Bonds payable 0.87 1,566,000 0.77 1,386,000
Common shares 0.52 260,000 0.52 260,000
Retained earnings 0.67 201,000 0.67 201,000
Retained earnings—20x 47,000**
Translation gain 275,000 155,000
$2,784,000 $2,310,000
**Retained earnings—20X3:
Net income, 20X3 CF800,000 $0.82 $ 656,000
Dividends, 20X3 (700,000) $0.87 (609,000)
Increase, 20X3 CF100,000 $ 47,000
b. Statements of financial position, temporal method:
20X3 20X2
Cash $0.87 $ 174,000 $0.77 $ 385,000
Accounts receivable 0.87 348,000 0.77 231,000
Inventory 0.85 340,000 0.74 148,000
Land 0.87 435,000
Equipment (net) 0.62 1,054,000 0.62 1,240,000
$2,351,000 $2,004,000
Accounts payable 0.87 $ 435,000 0.77 $ 308,000
Bonds payable 0.87 1,566,000 0.77 1,386,000
Common shares 0.52 260,000 0.52 260,000
Retained earnings 336,000* 0.67 201,000
Translation gain (loss) (246,000) (151,000)
$2,351,000 $2,004,000

*Retained earnings:
Balance, December 31, 20X2 CF300,000 $0.67 $ 201,000
Net income, 20X3 800,000 P9-2 744,000
Dividends, 20X3 (700,000) $0.87 (609,000)
Balance, December 31, 20X3 CF400,000 $ 336,000
c. Translation gain or loss, 20X3:
(1) Current-rate method:
Shareholders’ equity:
Beginning balance = CF800,000 ($0.87 – $0.77) = $ 80,000 gain
Net income = CF800,000 ($0.87 – $0.82) = 40,000 gain
$120,000 gain
(Alternative calculation)
Current-rate method: CF × $
Net assets, January 1, 20X3 $800,000 0.77 $616,000
Changes during the year
Net Income 800,000 0.82 656,000
Dividends (700,000) 0.87 (609,000)
Expected balance, December 31 663,000
Actual net assets,
December 31 (900,000) 0.87 783,000
Exchange gain $120,000
Proof:
Cumulative Translation Gain December 31 20X2 $155,000
Add: Translation Gain for 20X3 120,000
Cumulative Translation Gain December 31 20X3 275,000
(2) Temporal method
CF × $
Net monetary items, January 1, 20X3 (1,400,000) 0.7
7
$(1,078,000
)
Changes during the year
Sales 3,000,000 0.8
2
2,460,000
Purchases (1,000,000) 0.8
2
(820,000)
Other operating expenses (900,000) 0.8 (738,000)

2
Interest expense (200,000) 0.8
2
(164,000)
Purchase of land (500,000) 0.8
7
(435,000)
Dividends (700,000) 0.8
7
(609,000)
(306,000)
Expected balance, December 31 (1,384,000)
Actual net monetary items,
December 31 (1,700,000) 0.8
7
(1,479,000)
Exchange loss $ 95,000
Proof:
Cumulative Translation Loss December 21 20X2 $(151,000)
Add: Translation Loss for 20X3 ( 95,000)
Cumulative Translation loss December 31 20X3 (246,000)
P9-13
a. SEQEA would be translated using the current-rate method because the materials and
labour for the manufacturing operations are obtained from local sources and the plant
was financed with a loan from a Swedish bank.
b. Current-rate method
Account
Local
Currency
(SEK) Exchange rate
Translated
amounts (C $)
(I) Other expenses 3,850,000 0.18 693,000
(II) Inventory 200,000 0.15 30,000
(III) Common shares 100,000 0.24 24,000
(IV) Financial Statement
Translation gain or loss for 20X15:
Net Assets:
Balance January 1, 20X15 (1) 1,530,000 0.20 306,000
Changes during 20X15
Net income 500,000 0.18 90,000
Dividends paid (2) (325,000) 0.15 (48,750)

Actual balance (3) 1,705,000 0.15 255,750
FVI Translation Loss for 20X15
Goodwill January 1 20X15 1,000,000 0.20 200,000
No Changes During Year ___ _____
Derived Balance 200,000
Goodwill December 31 20X15 1,000,000 0.15 150,000
Net Translation Loss for 20X15 50,000
Total Translation Loss for 20X15 (91,500 + 50,000) 141,500
Notes:
1: 1,430,000 + 100,000 = 1,530,000
2: 1,430,000 + 500,000 – 1,605,000 = 325,000
3: 1,605,000 + 100,000 = 1,705,000
c. Temporal method
Account (SEK) Exchange rate C $
(I) Cost of goods sold
Purchases 4,020,000 0.18 723,600
Ending Inventory (200,000) 0.16 (32,000)
4,000,000 729,400
(II) Amortization expense
New plant 5,000 0.20 1,000
Other assets 145,000 0.24 34,800
150,000 35,800
(III) Monetary assets 2,400,000 0.15 360,000
(IV) Non-monetary liabilities 195,000 0.17 33,150
(V) Translation gain or loss for 20X15:
Monetary Items:
Balance January 1, 20X15 (1) (330,000) 0.20 (66,000)
Changes during 20X15:
Sales revenue (2) 8,525,000 0.18 1,534,500
Inventory purchases (4,020,000) 0.18 (723,600)
Other expense (3,850,000) 0.18 (693,000)

Dividends paid (325,000) 0.15 (48,750)
Actual balance (3) 0 0.15 0
Notes:
1: 2,170,000 – 2,500,000 = (330,000)
2: Sales revenue + change in deferred revenue (non-monetary liability) =
8,500,000 + [195,000 – 170,000] = 8,525,000
3: 2,400,000 – 2,400,000 = 0
4: There is no translation gain or loss on the goodwill FVI because it continues to
be translated at the historical rate.

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