CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

MasterToy, a U.S. based company, has a foreign subsidiary (Nippon MT) that makes and sells toys in Japan. Japan's currency is the yen. Under what circumstances would the temporal method be used for restating the financial results of a Nippon MT?

I. Nippon operates in a hyperinflationary economy.
II. MasterToy operates in a hyperinflationary economy.
III. Nippon's functional currency is the Yen.
IV. Nippon's functional currency is the dollar.
V. Nippon's functional currency is the British pound.
A. I, IV and V.
B. I, III and V.
C. I, II, IV and V.
Explanation: The temporal method is used to convert the financial data from the local currency into the functional currency, and when a subsidiary operates in a hyperinflationary economy. In other words, whenever the functional currency is not the local currency.

User Contributed Comments 2

User Comment
xanados This question is actually wrong. According to the books: "When a foreign entity has a functional currency that is different from the parent's presentation currency, the foreign entity's foreign currency financial statements are translated into the parent's presentation currency using the following procedures... These procedures essentially describe the current rate method."

IFRS and GAAP do not have a concept of a "local currency" as described in the the explanation. There is only the functional currency, and the parent's reporting currency.
Grahamite The question is right. Look in Reading 23, pp. 173-176 of the official curriculum.

The answer describes three circumstances where the temporal method would be used, i.e. hyperinflation, the parent's presentation currency is the functional currency (both dollars in this case). Also, when the foreign sub's financial statements are in yen, and its functional currency is the pound, the statements must be "remeasured" into pounds before they are "translated" into dollars.

I could be wrong, but this is what I gathered from the text. Hope it makes sense.
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