CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the impact the various translation methods will have on reported earnings of a subsidiary situated in a country that has persistent hyperinflation?

I. If the subsidiary's local currency was chosen as the functional currency, its assets, when converted into the reported currency, would be grossly inflated.
II. Under the current rate method, the reportable assets of the subsidiary would be almost negligible.
III. Under the temporal method, any devaluation in the currency in which the subsidiary operates in, will be partly offset by the local appreciation of its net monetary asset values.
IV. By having the subsidiary's net nonmonetary assets measured using historical exchange rates, its value will be less susceptible to the local currency's devaluation.
Correct Answer: II, III and IV

I is incorrect because if the subsidiaries local currency was chosen as the functional currency, its assets, when converted into the reported currency, would be negligible. Remember, countries with high inflation will have depreciating currencies. Hence, this will dramatically devalue the subsidiary's assets when translated to the presentation currency.

II is correct for the reasons cited in (I). The current rate method translates the subsidiaries balance sheet items using the current exchange rate.

User Contributed Comments 3

User Comment
TreasureH III: Temporal method would minimize ex rate exposure of the foreign subsidiaries' operation.
prabhur08 I dont understand III, could someone please explain?
DCPWS Shouldn't III say "net non-monetary" asset values?
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