Chapter P4, Problem 5Q

Question What causes balance sheet (or translation) exposure to foreign exchange risk? How does balance sheet exposure compare with transaction exposure?   In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?     How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?   What concept underlies the temporal method of translation? What concept underlies the current rate method of translation? How does balance sheet exposure differ under these two methods? What are the major procedural differences in applying the current rate and temporal methods of translation?

Darwin Ltd, an Australian company, acquires a beneficial interest and becomes the Holding company of an overseas entity in New Zealand, Wellington Ltd. In which currency will Darwin Ltd report its consolidated accounts, which includes its interest in the New Zealand company, Wellington Ltd? Explain the process involved

What are the circumstances under which the capital expenditure of a foreign subsidiary might have a positive NPV in local currency terms but be unprofitable from the parent firm’s perspective?

What modifications may be made to the domestic cost of capital for a foreign venture to account for currency rate and political risk?

Which is the most simple way that is able to protect a U.S firm's earnings of its consolidated income statement in the depreciation of euro relative to U.S. dollar?  A. Selling euros forward in the foreign exchange market. B. Partner with the local firm of the oversea market. C. Purchasing euros forward in the foreign exchange market. D. Establish a subsidiary in the oversea economy.

Assume that a U.S. company has a foreign subsidiary whose functional currency is the U.S. dollar. Explain how exchange rates between the foreign currency and the dollar would have to change in order to result in a current-year remeasurement loss and how the company could use a foreign currency loan receivable or payable to hedge against its net investment in the foreign subsidiary.

From the U.S. standpoint, a capital outflow will occur when a Japanese investor buys a portion of the U.S. government debt. True False

Pursuant to the Foreign Account Tax Compliance Act, foreign financial institutions will have to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Proper compliance will require specific information intended to preclude U.S. taxpayer investors to utilize such investment vehicles to obtain potentially tax-exempt benefits intended for foreign taxpayers. Failure to properly comply will result in a 30% withholding tax with respect to payments flowing outside the U.S. Group of answer choices True  False

What is the so-called Norwalk Agreement?a. An agreement between the FASB and SEC to allow foreign companies to use IFRS in their filing of financial statements with the SEC.b. An agreement between the U.S. FASB and the U.K. Accounting Standards Board to converge their respective accounting standards as soon as practicable.c. An agreement between the SEC chairman and the EU Internal Market commissioner to allow EU companies to list securities in the United States without providing a U.S. GAAP reconciliation.d. An agreement between the FASB and the IASB to make their existing standards compatible as soon as practicable and to work together to ensure compatibility in the future.