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 effects of translation exposure on financial data?

I. If the monetary assets of a foreign subsidiary exceeds its respective liabilities, and should the presentation currency depreciate, then this will result in a translation loss for the parent under the temporal method.
II. The operational effects of a foreign subsidiary is that portion of net income which would have been reported had the current period weighted average exchange rate equaled that of the previous year.
III. Holding gains effects arise as a result of translating foreign retained earnings amounts into the functional currency.
IV. Under the all current method, one must look at the net asset position as opposed to the net monetary asset position in order to compute a translation gain or loss.
A. I and IV
B. I and II
C. II and IV
Explanation: I is incorrect because if the monetary assets of a foreign subsidiary exceeds its respective liabilities, and should the presentation currency depreciate, then this will result in a translation gain for the parent.

III is incorrect because holding gains effects refers to the consequences that arise as a result of holding assets and liabilities denominated in foreign currencies.

User Contributed Comments 3

User Comment
HenryQ Good question!
dblueroom IV: reporting currency = parent currency, when it depreciates, LC appreciates. However, we need to assume the change in net exposure (one year to another) is also positive in order to conclude a translation gain will result.
ramdabom Tricky. Reporting currency = parent currency!
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