ACCT4070-L7_-_Group_Reporting_-_Foreign_Subsidiary

ACCT4070-L7_-_Group_Reporting_-_Foreign_Subsidiary -...

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Advanced Accounting I
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Group Reporting (7) - Consolidation with Foreign Subsidiary
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Learning Objectives After reading Chapter 7, you should be able to: Understand the concept of foreign exchange exposure Understand the differences between operating exposure and accounting exposure Understand the distinction between functional currency and presentation currency Understand the procedures for translating foreign currency financial statements under IAS21: Accounting for the Effects of Changes in Foreign Exchange Rates.
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Unit Outline Types of Foreign Exchange Rate Exposures Types of Accounting Exposures Presentation Currency v. Functional Currency Translation of Foreign Currency Financial Statements
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Types of Foreign Exchange Rate Exposures Foreign Exchange Exposure Accounting Exposure : Impacts the reported earnings and F/S items Operating Exposure : Affects the competitive position of the entity and the value of the entity
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Accounting Exposure It is the exposure to changes in exchange rates as a result of a firm: 1. Entering into foreign currency transactions This results in contractual rights and obligations, e.g. accounts receivables or payables denominated in foreign currency 2. Translating the foreign currency financial statements This is to translate the financial statements of foreign operations (e.g. subsidiaries, associates, joint ventures and branches) from foreign currency to the currency of the parent for the purpose of preparing consolidated financial statements of a Group. Accounting exposures: Quantifiable Have impacts on the reported profits, assets and liabilities in the financial statements
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Accounting Exposure Accounting Exposure Transaction exposure: Arises from foreign currency transactions e.g. Account receivable denominated in a foreign currency Translation exposure : Arises from translation of foreign currency financial statements of foreign operations Results in transaction gains or losses Recorded in the books of the individual entity Results in translation gains or losses Presented in consolidated financial statements (group level)
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Presentation Vs Functional Currency Functional Currency is the currency of the primary economic environment in which the entity operates. The choice of a functional currency of a business firm whose operations are mainly concentrated in one country is normally the currency of that country.
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Presentation Vs Functional Currency The functional currency of an entity is determined by the following factors: 1. The currency that mainly influence the sales prices of goods and
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