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AFA Practicing questions FX incl suggested solutions
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PRACTICING QUESTIONS (INCL SUGGESTED SOLUTIONS)Advanced Financial Accounting
Topic: Foreign Currency
Lecturer : Prof. Dr. Leo G. van der Tas
On 1 January 2018 Vortex NV buys a 30% interest in Bartex Inc at $24mln and accounts for it as
an associate using the equity method. Vortex NV has the euro as its functional currency and
presentation currency, Bartex Inc is a US company with the US Dollar as its functional currency.
In order to finance its investment and hedge itself against the dollar risk of investing in Bartex Inc,
Vortex takes out a loan of $15mln. It applies net investment hedge accounting to this loan. Also
on 1 January 2018 Bartex Inc lends US$ 5mln to Vortex NV. That loan has a life of 2 years,
cannot be renewed and Vortex NV pays no interest. During 2018 Bartex Inc generates $6 mln
profit. The USD:EUR exchange rate on 1 January 2018 is 1.1 to 1. The average rate throughout
2018 is 1.15 to 1 and the rate at 31 December 2018 is 1.2 to 1
A. What is the amount of the exchange rate gains and losses in 2018 that Vortex will
record in relation to its investment in Bartex Inc, the loan from Bartex Inc and the
loan to finance its investment in Bartex Inc (i) directly in its Foreign currency
translation account under OCI and (ii) in net income? Add your calculations.
(i)
Exchange rate loss on opening investment:
USD 24mln/1.2-USD 24 mln/1.1 €-1,818,181
Exchange rate loss on income 2018:
(USD6mln*30%)/1.2 – (USD6mln*30%)/1.15 €-65,217
Exchange rate gain on US$ loan to finance investment in Bartex Inc:
USD15 mln/1.2 – USD15mln/1.1 €1,136,363
Total loss recorded in FCTA €-747,035
The loan is less than the exposure in US$, so the net investment hedge is fully effective.
(ii)
Exchange rate gain on loan from Bartex:
USD 5mln/1.2 – USD 5mln/1.1 €378,787
This is a normal loan in foreign currency
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