Question Tag: Foreign Currency

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FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

Question

Gugi Plc. is a highly successful manufacturing company operating in Nigeria. In addition to sales within Nigeria, the company also exports to a foreign country (with currency F$) along the ECOWAS sub-region. The export sales generate annual net cash inflow of ₦50,000,000. Gugi Plc. is now considering whether to establish a factory in the foreign country and stop exporting from Nigeria to the country. The project is expected to cost F$1 billion, including F$200million for working capital.

A suitable existing factory has been located, and production could commence immediately. A payment of F$950million would be required immediately, with the remainder payable at the end of year one. The following additional information is available:

Annual production and sales in units: 110,000
Unit selling price: F$5,000
Unit variable cost: F$2,000
Unit royalty payable to Gugi Plc: ₦300
Incremental annual cash fixed costs: F$50million

Assume that the above cash items will remain constant throughout the expected life of the project of 4 years. At the end of year 4, it is estimated that the net realisable value of the non-current assets will be F$1.40billion.

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

If the new factory is set up and export to the foreign country is stopped, it is expected that new export markets of a similar worth in North Africa could replace the existing exports.

Production in Nigeria is at full capacity, and there are no plans for further capacity expansion.

Tax on the company’s profits is at a rate of 40% in both countries, payable one year in arrears. A double taxation agreement exists between Nigeria and the foreign country, and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the foreign country to Nigeria.

Tax allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital for the project is 13%.

Annual inflation rates in Nigeria and the foreign country are currently 5.6% and 10%, respectively. These rates are expected to remain constant in the foreseeable future. The current spot exchange rate is F$1.60 = N1. You may assume that the exchange rate reflects the purchasing power parity theorem.

Required:
a. Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:
i. Show all workings and calculations to the nearest million.
ii. State all reasonable assumptions. (18 Marks)

b. State TWO further information and analysis that might be useful in the evaluation of this project?

(2 Marks)

Answer

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Tags: Cash Flow Analysis, Exchange Rate, Foreign Currency, Investment Appraisal, Taxation
Level: Level 3

Topic: Investment Appraisal Techniques
Series: NOV 2016

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

Question

Omotola Nigeria Plc is a conglomerate which operates in different sectors of the economy. The company has many subsidiaries and associates across the six continents of the world, and its head office is located in Lagos, Nigeria. The shares of the company are listed on the Nigerian Stock Exchange.

The company is trying to finalize its financial statements for the year ended April 30, 2018, and the following accounting issues are being considered by the chief accountant based on the submission by the assistant accountant who is yet to complete her professional examinations with the Institute of Chartered Accountants of Nigeria. The functional and presentation currency of Omotola Nigeria Plc. is Naira. The following transactions relate to the company:

(i) On May 1, 2017, Omotola Nigeria Plc. bought an investment property in the United States for $1,000,000. The company uses the fair value model of IAS 40 to account for the investment property, and the fair value at April 30, 2018, is determined to be $1,200,000. The assistant accountant is unsure which exchange rate to use in translating the investment property at the year end and how to recognize any exchange difference that may arise.

(ii) On May 1, 2017, Omotola Nigeria Plc. acquired a wholly owned subsidiary in the United States of America. The goodwill that arose on the acquisition of this subsidiary is $400,000. In addition, the company invested in an equity instrument on the same date, which is measured at fair value through other comprehensive income (OCI) in accordance with the requirements of IFRS 9.

Required:

a. In accordance with the requirement of IAS 21 – Effect of Changes in Foreign Exchange Rates, discuss the treatment of foreign currency transactions and the gain or loss arising therefrom.
(7 Marks)

b. Discuss how the transaction in (i) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

c. Discuss how the transaction in (ii) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

Answer

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Tags: Exchange Rates, Foreign Currency, Goodwill, IAS 21, Investment Property
Level: Level 3

Topic: Foreign Currency Transactions and Translation (IAS 21)
Series: MAY 2018

PT – May 2021 – L2 – Q5c – Income Tax Liabilities

Compute the gift tax payable by Madam Gifty Kums based on gifts received during her vetting.

Question

Madam Gifty Kums was appointed a Minister of State in 2018. On the occasion of her vetting by Parliament, she received the following gifts:

Cash donation amounting to GH¢80,000 from her party foot soldiers within her constituency.
A Toyota Land Cruiser worth GH¢1,000,000 from the Chief of her village.
Cash of US$20,000 from her mother-in-law in Afghanistan (GH¢1 = US$5).

Required:
Compute the gift tax payable by Madam Gifty Kums.

Answer

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Tags: Foreign Currency, Gift tax, Minister of State, Tax computation
Level: Level 2

Series: MAY 2021

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

Question

i) Explanation of Exchange Exposure (2 marks):

Exchange exposure refers to the risk that a company’s financial performance or position may be affected by fluctuations in exchange rates between currencies. For an exporter quoting prices in a foreign currency, there is a risk that the value of the foreign currency may change before payment is received, leading to a gain or loss in the value of that payment when converted into the company’s domestic currency.

Exchange exposure is classified into three types:

Transaction Exposure: Risk arising from actual transactions involving foreign currency payments or receipts.
Translation Exposure: Risk from converting foreign subsidiaries’ financial statements into the parent company’s reporting currency.
Economic Exposure: Risk from the overall impact of exchange rate changes on a firm’s future cash flows and market value.

(2 marks)

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

Pre-acceptance exposure arises in the period between the time an exporter quotes a price in a foreign currency and the time the contract is accepted.

Two methods to minimize pre-acceptance exposure:

Time-Limited Quotes:
- The exporter can limit the validity period of the quote to a short timeframe, ensuring that the exchange rate does not fluctuate significantly before the contract is accepted.
- Advantage: This method reduces the period during which the exchange rate risk exists, thus minimizing potential exposure to currency fluctuations.
Forward Contracts:
- The exporter can lock in a forward contract to sell the foreign currency at a predetermined rate when the quote is accepted. This ensures that the company knows exactly what exchange rate will apply, regardless of fluctuations.
- Advantage: A forward contract provides certainty about the future exchange rate, allowing the exporter to avoid potential losses due to unfavorable exchange rate movements.

(2 marks for each method, 4 marks total)

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

Post-acceptance exposure arises after the contract has been accepted but before the payment has been received. There are several methods for hedging this exposure:

Borrowing in the Foreign Currency:
- The exporter can borrow the foreign currency equivalent of the receivable immediately and repay the loan once the foreign customer pays. This hedges the risk of adverse currency movements.
- Advantage: This method is relatively simple and cheap. It also provides immediate cash flow in the foreign currency and eliminates exchange rate risk.
Forward Contracts:
- The exporter can enter into a forward contract to sell the expected foreign currency receipt at a specified rate on the date payment is due. This locks in the exchange rate and eliminates the uncertainty associated with currency fluctuations.
- Advantage: Forward contracts offer certainty about the amount of the domestic currency that will be received, providing security and allowing for better financial planning without committing cash resources upfront.

Answer

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Tags: Exchange Exposure, Foreign Currency, Hedging, Post-Acceptance Exposure, Pre-Acceptance Exposure
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: MAY 2018

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

Question

Sadio Plc imports wheat from Ukraine for wholesale distribution. On 31 October 2022, Sadio purchased goods for €7.2 million cash at an exchange rate of GH¢1 = €0.12. At 31 October 2022, the net realisable value (NRV) of the inventory was estimated at €7.0 million, and the exchange rate at this date was GH¢1 = €0.14. Sadio’s directors recorded the inventory at its purchase cost in the financial statements for the year ended 31 October 2022.

Sadio only receives tax relief for any inventory loss when the related item is sold. The company’s tax rate at 31 October 2022 was 20%, but a revised rate of 25% was introduced on 18 November 2022. Assume that Sadio has sufficient taxable future profit.

Required:
Recommend the correct financial reporting treatment of the above in Sadio’s financial statements for the year ended 31 October 2022.

Answer

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Tags: Foreign Currency, Inventory, Tax, Translation
Level: Level 3

Topic: IAS 12: Income taxes
Series: MAR 2023

FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

Question

Annual production and sales in units: 110,000
Unit selling price: F$5,000
Unit variable cost: F$2,000
Unit royalty payable to Gugi Plc: ₦300
Incremental annual cash fixed costs: F$50million

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

If the new factory is set up and export to the foreign country is stopped, it is expected that new export markets of a similar worth in North Africa could replace the existing exports.

Production in Nigeria is at full capacity, and there are no plans for further capacity expansion.

Tax allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital for the project is 13%.

Required:
a. Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:
i. Show all workings and calculations to the nearest million.
ii. State all reasonable assumptions. (18 Marks)

b. State TWO further information and analysis that might be useful in the evaluation of this project?

(2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flow Analysis, Exchange Rate, Foreign Currency, Investment Appraisal, Taxation
Level: Level 3

Topic: Investment Appraisal Techniques
Series: NOV 2016

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

Question

Required:

b. Discuss how the transaction in (i) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

c. Discuss how the transaction in (ii) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Exchange Rates, Foreign Currency, Goodwill, IAS 21, Investment Property
Level: Level 3

Topic: Foreign Currency Transactions and Translation (IAS 21)
Series: MAY 2018

PT – May 2021 – L2 – Q5c – Income Tax Liabilities

Compute the gift tax payable by Madam Gifty Kums based on gifts received during her vetting.

Question

Madam Gifty Kums was appointed a Minister of State in 2018. On the occasion of her vetting by Parliament, she received the following gifts:

Cash donation amounting to GH¢80,000 from her party foot soldiers within her constituency.
A Toyota Land Cruiser worth GH¢1,000,000 from the Chief of her village.
Cash of US$20,000 from her mother-in-law in Afghanistan (GH¢1 = US$5).

Required:
Compute the gift tax payable by Madam Gifty Kums.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Foreign Currency, Gift tax, Minister of State, Tax computation
Level: Level 2

Series: MAY 2021

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

Question

i) Explanation of Exchange Exposure (2 marks):

Exchange exposure is classified into three types:

Transaction Exposure: Risk arising from actual transactions involving foreign currency payments or receipts.
Translation Exposure: Risk from converting foreign subsidiaries’ financial statements into the parent company’s reporting currency.
Economic Exposure: Risk from the overall impact of exchange rate changes on a firm’s future cash flows and market value.

(2 marks)

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

Pre-acceptance exposure arises in the period between the time an exporter quotes a price in a foreign currency and the time the contract is accepted.

Two methods to minimize pre-acceptance exposure:

Time-Limited Quotes:
- The exporter can limit the validity period of the quote to a short timeframe, ensuring that the exchange rate does not fluctuate significantly before the contract is accepted.
- Advantage: This method reduces the period during which the exchange rate risk exists, thus minimizing potential exposure to currency fluctuations.
Forward Contracts:
- The exporter can lock in a forward contract to sell the foreign currency at a predetermined rate when the quote is accepted. This ensures that the company knows exactly what exchange rate will apply, regardless of fluctuations.
- Advantage: A forward contract provides certainty about the future exchange rate, allowing the exporter to avoid potential losses due to unfavorable exchange rate movements.

(2 marks for each method, 4 marks total)

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

Post-acceptance exposure arises after the contract has been accepted but before the payment has been received. There are several methods for hedging this exposure:

Borrowing in the Foreign Currency:
- The exporter can borrow the foreign currency equivalent of the receivable immediately and repay the loan once the foreign customer pays. This hedges the risk of adverse currency movements.
- Advantage: This method is relatively simple and cheap. It also provides immediate cash flow in the foreign currency and eliminates exchange rate risk.
Forward Contracts:
- The exporter can enter into a forward contract to sell the expected foreign currency receipt at a specified rate on the date payment is due. This locks in the exchange rate and eliminates the uncertainty associated with currency fluctuations.
- Advantage: Forward contracts offer certainty about the amount of the domestic currency that will be received, providing security and allowing for better financial planning without committing cash resources upfront.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Exchange Exposure, Foreign Currency, Hedging, Post-Acceptance Exposure, Pre-Acceptance Exposure
Level: Level 3

Topic: Hedging against financial risk: Non-derivative techniques
Series: MAY 2018

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

Question

Required:
Recommend the correct financial reporting treatment of the above in Sadio’s financial statements for the year ended 31 October 2022.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Foreign Currency, Inventory, Tax, Translation
Level: Level 3

Topic: IAS 12: Income taxes
Series: MAR 2023

Question Tag: Foreign Currency

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FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

PT – May 2021 – L2 – Q5c – Income Tax Liabilities

Compute the gift tax payable by Madam Gifty Kums based on gifts received during her vetting.

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

i) Explanation of Exchange Exposure (2 marks):

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

PT – May 2021 – L2 – Q5c – Income Tax Liabilities

Compute the gift tax payable by Madam Gifty Kums based on gifts received during her vetting.

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

i) Explanation of Exchange Exposure (2 marks):

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

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FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

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CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

You're reporting an error for "CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)"

PT – May 2021 – L2 – Q5c – Income Tax Liabilities

Compute the gift tax payable by Madam Gifty Kums based on gifts received during her vetting.

You're reporting an error for "PT – May 2021 – L2 – Q5c – Income Tax Liabilities"

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

i) Explanation of Exchange Exposure (2 marks):

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

You're reporting an error for "AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques"

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

You're reporting an error for "CR – Mar 2023 – L3 – Q3b – IAS 12"

FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

You're reporting an error for "FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques"

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

You're reporting an error for "CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)"

PT – May 2021 – L2 – Q5c – Income Tax Liabilities

Compute the gift tax payable by Madam Gifty Kums based on gifts received during her vetting.

You're reporting an error for "PT – May 2021 – L2 – Q5c – Income Tax Liabilities"

AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques

Explaining exchange exposure and methods for minimizing and hedging against both pre- and post-acceptance exposure.

i) Explanation of Exchange Exposure (2 marks):

ii) Methods for Minimizing Pre-Acceptance Exposure (4 marks):

iii) Hedging Methods for Post-Acceptance Exposure (4 marks):

You're reporting an error for "AFM – May 2018 – L3 – Q5b – Hedging against financial risk: Non-derivative techniques"

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

You're reporting an error for "CR – Mar 2023 – L3 – Q3b – IAS 12"

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