CPQ 12.1 Guidance
(i) We can determine that the current-rate method of translation is being used because the translation difference is being recognised in the translation reserve. The alternative method would result in the translation difference being recognised in profit or loss.
(ii) The subsidiary’s currency has appreciated relative to that of the parent. Consider ALK exercise 10.6 as an example. The parent invests in a subsidiary, . The subsidiary maintains positive equity. The currency (British pound) appreciates against the A$ during 20X1.1 This results in an increase in the foreign currency translation reserve because the closing net assets are translated at an exchange rate resulting in larger A$ amounts at balance date than was applied to the opening net assets (historical rate) and profit (transaction or average
exchange rates as translated in the income statement). Refer to Note 2, 20X1 of Exercise 10.6.
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(b) If the subsidiary is exporting, with sales priced in Malaysian ringgit, the appreciation of the Malaysian ringgit will make its goods cost more from the perspective of its customers. E.g., if the subsidiary is exporting to the United States of America, it will cost the American customers more US$ to pay for their purchases, because the US$ will buy less Malaysian ringgit. This will make the subsidiary’s exports less competitive in international markets and accordingly, may be seen as bad news for investors in the Australian parent.
1 A$ buys £0.75 at the beginning of the year but buys only £0.60 at the end of the year, with decline throughout the year indicated by the average exchange rate of A$1 = £0.65. Therefore, the British pound appreciated against the A$ during the year.
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