CFA Practice Question

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CFA Practice Question

Garden Scents, Inc. is a U.S. based multinational corporation. They have overseas operations in England (Scents, Ltd.) and in France (Le Jardin). The functional currency of Le Jardin is the franc. The British subsidiary is just a sales outlet for the French subsidiary. Preparing financial statements for Garden Scents would begin as follows:
A. Scent's financial results are translated from pounds to US$.
B. Scents, Ltd.'s financial results are remeasured using the temporal method from Pounds Sterling to its functional currency, francs. The remeasured statements are then translated using the current rate from francs into dollars.
C. Scent's financial results are translated from pounds to francs, and then remeasured into dollars.
Explanation: If the subsidiary is nothing more than a foreign sales outlet for the parent company's products and services, then the functional currency is the (reporting) currency. If the subsidiary's main operations are not in its local currency but another currency, then the other currency is the functional currency (but the functional currency is not necessarily the parent currency), such as in the case of Scents Ltd. Therefore, Scent's financial statements are remeasured into francs first, and then translated into U.S. dollars.

User Contributed Comments 2

User Comment
mrpman In the part of the answer (b) that asks "The remeasured statements are then translated using the current rate from francs to dollars."

I got thrown off because it says they are being remeasured using the current rate. Do they mean current rate method? If so then I can see how b is correct. I that that they would translate every single item on the financial statements using the current rate
AqeelAli7 The British foreign sales outlet is for the French subsidiary products and services though. So wouldn't the British foreign sales outlet be under significant influence/decision making from the French subsidiary. Thereby, having Scents Ltd. local currency equal the French currency?
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