Question

Zugar Company is domiciled in a country whose currency is the dinar. Zugar begins 2017 with three assets: cash of 25,800 dinars, accounts receivable of 81,500 dinars, and land that cost 215,000 dinars when acquired on April 1, 2016. On January 1, 2017, Zugar has a 165,000 dinar note payable, and no other liabilities. On May 1, 2017, Zugar renders services to a customer for 135,000 dinars, which was immediately paid in cash. On June 1, 2017, Zugar incurred a 115,000 dinar operating expense, which was immediately paid in cash. No other transactions occurred during the year. Currency exchange rates for 1 dinar follow:

April 1, 2016	$0.48	=	1 dinar
January 1, 2017	0.51	=	1
May 1, 2017	0.52	=	1
June 1, 2017	0.54	=	1
December 31, 2017	0.56	=	1

1. Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the dinar is the subsidiary’s functional currency. What is the translation adjustment for this subsidiary for the year 2017?

2. Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the U.S. dollar is the subsidiary’s functional currency. What is the remeasurement gain or loss for 2017?

3. Assume that Zugar is a foreign subsidiary of a U.S. multinational company. On the December 31, 2017, balance sheet, what is the translated value of the Land account? On the December 31, 2017, balance sheet, what is the remeasured value of the Land account?

(Input all amounts as positive.)

Answer 1

The given question is within the purview of IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’. As per the question Zugar Company is domiciled in a country whose currency is the Dinar. There are total 3 sub-part of the question. Let’s solve these with the relevant literature of IAS 21.

Q1. Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the dinar is the subsidiary’s functional currency. What is the translation adjustment for this subsidiary for the year 2017?

Answer:

In the given scenario reporting currency of the parent company is different from the subsidiary company’s functional currency hence there will be translation differences while converting the subsidiary’s financial statement into the presentation currency of parent company.

Following rules will become applicable for translation of financial statement from subsidiary’s functional currency to presentation currency of parent:

(a) Assets and liabilities shall be translated at the closing rate at the date of that statement of financial position i.e. December 31, 2017 in the given scenario.

(b) Income and expenses for each statement presenting profit or loss and other comprehensive income (i.e. including comparatives) shall be translated at exchange rates at the dates of the transactions; and

(c) All resulting exchange differences shall be recognized in other comprehensive income.

Particulars	Dinar	Rate	Conversion rate	USD value
Balance sheet translation
Cash	45,800	Closing	$0.56	25,648
Accounts receivable	81,500	Closing	$0.56	45,640
Land	125,000	Closing	$0.56	70,000
Total Assets	252,300			141,288
Note payable	165,000	Closing	$0.56	92,400
Share capital		Acquisition date
Retained earnings - Pre-acquisition		Acquisition date
Profits post acquisition		Using average rate for the respective year

Note:

1. As complete information for share capital, retained earnings and date of acquisition of subsidiary is not given hence translation rule for share capital and retained earnings is mentioned in above table instead of specific amount.

2. Cash balance has been increased by Net $20,000 transaction during the year as compared to the opening balance of $25,800. (Received from customer $135,000 and paid for expenses of $115,000)

Profit and loss statement conversion

Particulars	Dinar	Rate	Conversion rate	USD value
Profit and loss translation
Revenue	135,000	Transaction date	$0.52	70,200
Operating expense	115,000	Transaction date	$0.54	62,100

Q2. Assume that Zugar is a foreign subsidiary of a U.S. multinational company that uses the U.S. dollar as its reporting currency. Assume also that the U.S. dollar is the subsidiary’s functional currency. What is the remeasurement gain or loss for 2017?

Answer:

In the given scenario reporting currency of both parent and subsidiary companies are same i.e. U.S. dollar. However all the major transactions of the subsidiary company happened in Dinar which is different from the reporting currency hence there will be revaluation gain / loss for monetary items as per IAS 21. Refer below rules of revaluation as per IAS 21:

(a) Foreign currency monetary items shall be translated using the closing rate; i.e. Cash, Accounts receivable, Notes payable in the given scenario

(b) Non‑monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and i.e. Land in the given scenario. There will be no remeasurement gain or loss on land value being a non-monetary asset.

Remeasurement gain / loss would be calculated for the difference in the value of balances which was existed at the start of the year and at the end of the year using the exchange rates at the start of the year and at the end of the year:

Particulars	Cash	Accounts receivable	Notes payable
Dinar -31.12.17	45,800	81,500	165,000
Dinar -1.1.17	25,800	81,500	165,000
Conversion Rate - 31.12.17	0.56	0.56	0.56
Conversion Rate - 1.1.17	0.51	0.51	0.51
USD Value 31.12.17	81,786	145,536	294,643
USD Value 1.1.17	50,588	159,804	323,529
Remeasurement gain	-	-	28,887
Remeasurement loss	1,290	14,268	-

Q3. Assume that Zugar is a foreign subsidiary of a U.S. multinational company. On the December 31, 2017, balance sheet, what is the translated value of the Land account? On the December 31, 2017, balance sheet, what is the remeasured value of the Land account?

Answer:

On December 31, 2017 the translated value of the land for the purpose of consolidation in parent books will be converted using the closing exchange rate as of December 31, 2017 hence land value will be $70,000. [125,000 / 0.56 = $70,000].

On December 31, 2017 remeasured value of land in the books of Zugar will be using the exchange rate as of the date of purchase of land i.e. using the exchange rate of April 01, 2016. Hence value of land would be $60,000. [125,000/0.48].