Tutorial 10 Answers

Tutorial 10 Answers - Tutorial 10 Answers 1 Why do we need...

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Tutorial 10 Answers 1. Why do we need to translate the accounts of a foreign operation? Where an entity controls other entities there is a requirement to consolidate the financial  statements of the parent entity with those of the controlled entities (the subsidiaries).  Prior to consolidation it is necessary that all the financial statements are denominated in  the same currency (the presentation currency), otherwise the consolidated amounts would  tend   towards   being   meaningless.  Translation   of   accounts   is   required   where   the  presentation currency is different to the functional currency. 2. Explain why foreign currency gains or losses in relation to the translation of the accounts of a foreign operation are not treated as part of the period’s profit or loss, but instead are transferred to an equity account referred to as the foreign currency translation reserve. Often the foreign operation performs its operations in a currency other than that of the  parent entity, a currency which is independent of the effects of movements in their parent  entity’s domestic currency. As such, the foreign operation insulates itself from the effects  of variations in the exchange rates between the parent’s currency and its own currency.  The parent entity will not be exposed to foreign exchange gains and losses in relation to  the foreign operation’s cash flows.  Any increase or decrease in the Australian dollar  equivalent of the foreign operation’s assets will at least in part be offset by changes in the  Australian dollar equivalent of the foreign operation’s liabilities.  The exposure will be  limited to the difference between the assets and the liabilities, that is, limited to the net  assets of the foreign operation. Because the foreign operation often acts independently, with limited cash flow influences  on, or interactions with the parent entity, any gains or losses related to translating the  net assets will not be treated as part of income, but will be transferred to reserves. The 
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This note was uploaded on 04/30/2011 for the course BUSS 3003 taught by Professor Kentwilson during the Three '11 term at South Australia.

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Tutorial 10 Answers - Tutorial 10 Answers 1 Why do we need...

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