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ACC 703 (10)

Week 12 PCA.docx

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ACC 703
Deidre Taylor

Wednesday November 28, 2012 Chapter 11, Case 4 Vulcan Manufacturing Limited - Non-monetary assets and liabilities brought using price level and adjusted in foreign currency o Adjust using general Price Level Index - Gains and losses brought through to IS in foreign currency - Use exchange rate to bring to Cdn dollar for every asset Report to CFO - Gaap constraint, public company - Summarize and explain IAS 21 and IAS 29 o Functional currency approach o SAPI in a Hyperinflationary environment  100% inflation in the last year  Must use IAS 29 not IAS 21 o Do they pay for goods, borrow or lend in the foreign currency  How much risk are Canadian payers taking on?  If foreign currency = functional currency, use foreign exchange rate method  If functional currency is Cdn dollar, use temple method  Only exception is if they are in an inflationary environment - Suggest appropriate communication with shareholders so that they understand investment in SAPI - Comment on a bonus plan for management Current Rate Method - Uses foreign currency as functional currency: Current rate used to translate SFP - Historical rate for shareholders’ equity accounts (May use average rate for IS) - Exchange gains/losses deferred in separate component of shareholders’ equity - Foreign operations is self sustaining and conducts its business in local currency - Parent’s exposure - Exchange rates may change over time - Sub may maintain ability to pay dividends - Increase in op CF of sub may offset amount of devaluation - Currency rate used for self sustaining foreign op if no hyperinflation present - VML cannot use Current rate in currency year but would revert to this method IAS 29 - Need to select a general price index (GPI) - Segregate financial statements into monetary/non-monetary - Monetary not restated - Restate all non items using GPI - Non-monetary at market only restated for price increase from date of valuation - Income and Expenses restated using GPI from date f transaction - FX gains and losses in IS o Temporal method doesn’t give same results but - FS then translated Temporal Method - Temporal “Related to time” Multiple rates used to translate FS - Briefly explain method - Reports tractions and balances in a manner consistent with measurement basis for foreign currency transactions in Canada - Appropriate for integrated foreign operations where functional currency is Cdn dollar - *MAKE SURE TO UNDERSTAND THIS MATERIAL* - Exchange gain/losses when monetary items settled at diff rates than ones used to record original transactions - No gain/loss on non-monetary items - When FC devalues shareholders Comparison of Methods - Current Rate: accounting exposure is net assets; functional currency is FC - Temporal Method Accounting exposure is a net monetary position which can be a net asset exposure or net liability exposure - Economic exposure for VML is impact of exchange rate change on future cash flows of SAPI - When hyperinflation ceases, SAPI will use the Current Rate method o Start with opening net monetary balance to calculate, cash, A/R, long-term accounts o Decreased by expenses, interest payables o Reconcile to closing net monetary balance to get net gain/loss o If still does not balance, need to look for other factors  Use gross purchases during the year, not cost of goods sold  Find by difference between opening and closing inventory balances  Changes in prepaid expenses, unearned revenue, purchases in prop and equip o Go through everything that cause net monetary account to change Communicating Economic Facts - To capture economic effects for Fiscal year 5, VML need to use Price level adjusted statements prior to translation - Shareholders mainly concerned with amount timing and uncertainty of dividend payments - Will need to have more extensive note disclosure and provide more detailed segmented information to ensure users have enough information to decide whether to keep or sell their shares Other Information - Impact of inflation on operating cash flows - SAPI’s ability to service long-term debt - Evaluating SAPI performance in Cdn dollars o Local management would have to set prices to recover both local inflation and local devaluation to enable real return in Cdn dollars - Problem: exchange rate factors beyond management control Translation using Current Rate - Total assets FCU310,180 = Cdn 62,036 - Total liabilities FC222,340 = Cdn 44,468 - Shareholders’ equity = Cdn 17,568 - Note all individual accounts converted at .20 Functional currency: CDN $ - Cash, short-term investments and Accounts receivable, current liabilities and long-term debt all monetary balances and reported at closing rate of .20 - Inventory reported at lower of cost and net realizable value o Cost FC 67,000 * 0.3 = $20,160 o NRV FC 100,000 * 0.2 = $20,000 o Report $20,000 - Prepaid expenses FC 8.045 * 0.25 - Plant assets net of FC 128,800 * 0.40 = $51,120 - Check figure for total assets = $94,758 - Shareholders’ equity plus of $50,290 - Note when functional currency is Cdn dollar, Foreign currency gains and losses are recognized in IS Opening net monetary balance using numbers from problem 10, page 629 - Opening Net monetary balance (900) = Cash 3,900 + A/R 2,100 – Current monetary liabilities 900 – long-term debt 6,000 o Know ending is 1,400, need to
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