Foreign Currency Matters - Essay Example

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In the paper “Foreign Currency Matters Foreign Currency Matters” the author discusses the statement that in a hyperinflation environment, the local currency is not stable enough to serve as a functional currency. Losses occur if such a currency is used…
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Foreign Currency Matters
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Foreign Currency Matters
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1. Wilkins was correct in his statement that in that in a hyperinflation environment, the local currency is not stable enough to serve as a functional currency. Losses occur if such a currency is used. This means that the more stable currency of the reporting parent company will be used. Hirauye’s statement was, therefore, incorrect (Earnest & Young, 2014).
2. In a situation where Singapore Dollar is the subsidiary’s functional currency for Molsan Industries’ Japanese Subsidiary, it means that books will be kept in the functional currency. On reporting the same to the parent company, the currency and hence books will be remeasured to Canadian Dollar based on the current exchange rates. On the other hand, if the functional currency is the Japanese Yen, then there will be no effect on exchange rates. This means that cash flows will not be impacted, hence not included in net income (Financial Accounting Standards Board, 1981).
In a situation where more than half of the subsidiary’s revenue is Singapore sources, the Singapore Dollar will be the functional currency but the end of year finances will be reported in Japanese Yen. On the other hand, if more than half of the subsidiary’s revenue is from Japanese sources then the functional and reporting currency will remain as Japanese Yen (Earnest & Young, 2014).
3. Tylo’s functional currency is British Pounds in Britain, but the reporting currency is the US Dollars.
4. Remeasurement means that a subsidiary’s functional currency is the dominant in record keeping. At the end of the year the current exchange rates are put into account before reporting such that any gain or loss is reflected in the income statement. On the other hand, translation means the books are kept on the functional currency and transferred directly to the reporting currency without reflecting any gain or loss out of the exchange process. This can be reflected on the equity books away from financial books (Carmichael, Whittington & Graham, 2007).
5. Windbigler’s statement is incorrect when he says that the current exchange rate is defined as the exchange rate between functional currencies and reporting currencies at the balance sheet. In practice, the current exchange rate is defined as exchange rate at the balance sheet of the functional currency before the reporting currency. Alvarez statement is correct concerning monetary assets and liabilities (Georgiades, 2008).
6. They will use remeasurement while converting from CHF to USD. Such exchange and or conversion are reported in the income statement as either a loss or gain (Finke, S, 2006).

Carmichael, D, Whittington, O, & Graham, L, 2007. Accountants' Handbook, Volume 1: Financial Accounting and General Topics, John Wiley & Sons Inc., New Jersey.
Earnest & Young, 2014, “Foreign Currency Matters”, Financial Reporting Development: A Comprehensive Guide, retrieved on 17th March 2015 from$FILE/FinancialReportingDevelopments_BB2103_ForeignCurrency_5June2014.pdf
Financial Accounting Standards Board, 1981, “Foreign Currency Translation”, Statement of Financial Accounting Standards No. 52, retrieved on 17th March 2015 from
Finke, S, 2006, SAP Foreign Currency Revaluation: FAS 52 and GAAP Requirements, John Wiley & Sons Inc., New Jersey.
Georgiades, G, 2008, GAAP Financial Statement Disclosures Manual 2008-2009, CCH Group, Chicago.
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