Q1. The local currency is best characterized as:

A)   the preferred functional currency for subsidiaries that are highly integrated with the parent.

B)   translated into the functional currency under the all-current method.

C)   the currency of the country in which the foreign subsidiary is located.

Q2. Which of the following statements describing the choice of the functional currency is FALSE? The functional currency should be

    the same as the parent’s reporting currency if the subsidiary is:

A)   mostly independent from the parent.

B)   highly integrated with the parent where the local currency, prices, and some costs are controlled or restricted.

C)   highly integrated with the parent where the local currency, prices, and some costs are not controlled or restricted.

Q3. Deborah Ortiz, CFA^®, is the director of Global Research for F.E. Horton & Co. Ortiz recently hired two junior analysts, Tina

     Hirauye and Dominique Wilkins to assist in the financial statement analysis of global conglomerates. Hirauye and Wilkins are

     both Level 2 candidates in the CFA^® Program, so Ortiz thought they would be the ideal people to work on a project dealing with

     consolidating the results of foreign operating units in the financial statements of the global parent.

Before starting on the project, Ortiz has a meeting with Hirayue and Wilkins to discuss the use of different currencies in a company’s operations. At the meeting, Hirayue states that when analyzing multinational firms, there cannot be a difference between local and functional currencies. Wilkins disagrees with her and states that there can be a difference between local and functional currencies, but only if the parent of the subsidiary operates in a hyperinflationary environment. After another 30 minutes of discussion, Ortiz concludes the meeting by telling them to make sure they understand the different accounting rules for remeasurement and translation, under SFAS 52.

§           Hirauye and Wilkins are given projects involving three different firms:

§           Molsan Industries is a Canadian multinational firm with a subsidiary in Japan. The subsidiary has operations in both Japan and Singapore.

§           Tylo Corporation is a multinational firm based in France. Tylo does business on a global basis, but prepares and issues consolidated financial statements in U.S. dollars. Tylo has a subsidiary that does business in the United Kingdom. The majority of the cash that the subsidiary generates and expends is denominated in British Pounds (GBP).

§           Neslarone is based in Switzerland and generates the majority of its cash in Swiss Francs (CHF). The firm issues and prepares its consolidated financial statements in U.S. dollars.

Hirauye and Wilkins spend the morning reviewing the details of their assignment and decide to take a break for lunch at a restaurant across the street from F.E. Horton & Co.’s headquarters. They agree that they have a challenging task and both are nervous about turning in their consolidated financial statements to Ortiz on the following day. At the restaurant, the two junior analysts run into two F.E. Horton senior analysts, Brad Windbigler and Elizabeth Alvarez, and the four of them decide to eat lunch together. Windbigler and Alvarez recently found out that they both passed Level 3 of the CFA^® Exam, and, upon hearing about the task assigned by Ortiz, they are eager to help their two junior colleagues. Windbigler states that the current exchange rate is defined as the exchange rate between functional and reporting currencies at the balance sheet date, excluding all of a firm’s hedging activities. Alvarez also tries to offer assistance by stating that the correct exchange rate to use for monetary assets and liabilities when applying the temporal method is the average rate. When lunch is over, Hirauye and Wilkins thank their colleagues for their advice and go back to work to finish their assignment.

Regarding the statements made at the meeting:

A)   Hirauye’s statement is incorrect; Wilkins’ statement is correct.

B)   Hirauye’s statement is correct; Wilkins’ statement is correct.

C)   Hirauye’s statement is incorrect; Wilkins’ statement is incorrect.

答案和详解如下：

Q1. The local currency is best characterized as:

A)   the preferred functional currency for subsidiaries that are highly integrated with the parent.

B)   translated into the functional currency under the all-current method.

C)   the currency of the country in which the foreign subsidiary is located.

Correct answer is C)         

The basis for using the all current method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.
The local currency is best described as the currency of the country in which the foreign subsidiary is located. If a subsidiary is highly integrated with its parent or operating in a high-inflation environment, the functional currency is the parent’s currency. Local currencies are remeasured under the temporal method.

Q2. Which of the following statements describing the choice of the functional currency is FALSE? The functional currency should be

    the same as the parent’s reporting currency if the subsidiary is:

A)   mostly independent from the parent.

B)   highly integrated with the parent where the local currency, prices, and some costs are controlled or restricted.

C)   highly integrated with the parent where the local currency, prices, and some costs are not controlled or restricted.

Correct answer is A)

The basis for using the all current method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.
The preferred functional currency for subsidiaries that are mostly independent of the parent is the local currency. For highly integrated subsidiaries (regardless of local conditions), or for subsidiaries operating in high-inflation environments, the parent’s reporting currency should be used as the functional currency.

Q3. Deborah Ortiz, CFA^®, is the director of Global Research for F.E. Horton & Co. Ortiz recently hired two junior analysts, Tina

     Hirauye and Dominique Wilkins to assist in the financial statement analysis of global conglomerates. Hirauye and Wilkins are

     both Level 2 candidates in the CFA^® Program, so Ortiz thought they would be the ideal people to work on a project dealing with

     consolidating the results of foreign operating units in the financial statements of the global parent.

Before starting on the project, Ortiz has a meeting with Hirayue and Wilkins to discuss the use of different currencies in a company’s operations. At the meeting, Hirayue states that when analyzing multinational firms, there cannot be a difference between local and functional currencies. Wilkins disagrees with her and states that there can be a difference between local and functional currencies, but only if the parent of the subsidiary operates in a hyperinflationary environment. After another 30 minutes of discussion, Ortiz concludes the meeting by telling them to make sure they understand the different accounting rules for remeasurement and translation, under SFAS 52.

§           Hirauye and Wilkins are given projects involving three different firms:

§           Molsan Industries is a Canadian multinational firm with a subsidiary in Japan. The subsidiary has operations in both Japan and Singapore.

§           Tylo Corporation is a multinational firm based in France. Tylo does business on a global basis, but prepares and issues consolidated financial statements in U.S. dollars. Tylo has a subsidiary that does business in the United Kingdom. The majority of the cash that the subsidiary generates and expends is denominated in British Pounds (GBP).

§           Neslarone is based in Switzerland and generates the majority of its cash in Swiss Francs (CHF). The firm issues and prepares its consolidated financial statements in U.S. dollars.

Hirauye and Wilkins spend the morning reviewing the details of their assignment and decide to take a break for lunch at a restaurant across the street from F.E. Horton & Co.’s headquarters. They agree that they have a challenging task and both are nervous about turning in their consolidated financial statements to Ortiz on the following day. At the restaurant, the two junior analysts run into two F.E. Horton senior analysts, Brad Windbigler and Elizabeth Alvarez, and the four of them decide to eat lunch together. Windbigler and Alvarez recently found out that they both passed Level 3 of the CFA^® Exam, and, upon hearing about the task assigned by Ortiz, they are eager to help their two junior colleagues. Windbigler states that the current exchange rate is defined as the exchange rate between functional and reporting currencies at the balance sheet date, excluding all of a firm’s hedging activities. Alvarez also tries to offer assistance by stating that the correct exchange rate to use for monetary assets and liabilities when applying the temporal method is the average rate. When lunch is over, Hirauye and Wilkins thank their colleagues for their advice and go back to work to finish their assignment.

Regarding the statements made at the meeting:

A)   Hirauye’s statement is incorrect; Wilkins’ statement is correct.

B)   Hirauye’s statement is correct; Wilkins’ statement is correct.

C)   Hirauye’s statement is incorrect; Wilkins’ statement is incorrect.

Correct answer is C)

The basis for using the all current method is when Functional Currency is NOT the same as Parent's Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent's Presentation Currency.
Hirauye and Wilkins both make incorrect statements regarding local and functional currencies. A foreign subsidiary may have a local currency but designate another currency as its functional currency. The functional currency is defined as the currency of the primary environment in which the subsidiary generates and expends cash, but the choice of the functional currency is ultimately a function of management’s judgment. Wilkins is also incorrect because the rate of inflation does not necessarily have an impact on designated currencies.

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