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NCEA Level 3 Accounting study materials
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NCEA Level 3 Accounting practice questions

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Question 1Accounting concepts for an entity operating in a global environment

Under NZ IAS 21, the functional currency of an entity operating in a global environment is best described as:

  1. the currency in which its financial statements are presented to shareholders
  2. the currency of the country where its shares are listed on the exchange
  3. the currency named in most of its sales contracts with overseas customers
  4. the currency of the primary economic environment in which it operates Correct answer.

Explanation

NZ IAS 21 identifies the functional currency by reference to the primary economic environment in which the entity operates - normally the environment where it mainly generates and spends cash. The presentation currency is a separate reporting choice, and factors such as the location of the share register or the currency used on invoices are only supporting indicators.

Question 2Accounting concepts for an entity operating in a global environment

At balance date a New Zealand company has an unpaid invoice owing to a supplier in Singapore, denominated in Singapore dollars. Under NZ IAS 21, the payable is translated for the financial statements using the:

  1. closing rate at the reporting date Correct answer.
  2. average rate for the reporting period
  3. historical rate on the date the goods were ordered
  4. forward rate for delivery in twelve months

Explanation

A foreign currency payable is a monetary item, so it is retranslated at the closing rate at every reporting date and the resulting exchange difference is recognised in profit or loss. The rate on the date the order was placed is not a translation rate, and average and forward rates serve different purposes.

Question 3Accounting concepts for an entity operating in a global environment

A New Zealand retailer buys inventory on credit for US$18,000 when the exchange rate is NZ$1 = US$0.7500. Ignoring freight and customs duty, the inventory is initially recorded at:

  1. NZ$24,000 Correct answer.
  2. NZ$1,350
  3. NZ$13,500
  4. NZ$18,000

Explanation

The foreign currency amount is converted into the functional currency by dividing by the exchange rate expressed as foreign currency units per NZ dollar. US$18,000 ÷ 0.7500 = NZ$24,000, and the same amount is recorded for the payable, so the transaction is initially balanced.

Question 4Accounting concepts for an entity operating in a global environment

On 1 May a New Zealand company bought machinery on credit for US$24,000 when the rate was NZ$1 = US$0.8000, recording a payable of NZ$30,000. At the 31 March balance date the rate is NZ$1 = US$0.7500 and the invoice is still unpaid. The effect on the financial statements is:

  1. an exchange loss of NZ$2,000 recognised in other comprehensive income
  2. an exchange loss of NZ$2,000 recognised in profit or loss Correct answer.
  3. no exchange difference, because the payable was recorded at the rate on 1 May
  4. an exchange gain of NZ$2,000 recognised in profit or loss

Explanation

The payable is monetary and is retranslated at the closing rate: US$24,000 ÷ 0.7500 = NZ$32,000, compared with the original NZ$30,000. The NZ dollar has weakened, so the payable now costs more NZ dollars and the NZ$2,000 increase is an exchange loss recognised in profit or loss.

Question 5Accounting concepts for an entity operating in a global environment

A New Zealand manufacturer imports a production machine from Germany on credit. Under NZ IAS 16, which of the following is added to the invoiced purchase price when determining the machine's cost?

  1. customs duty and freight to the New Zealand factory Correct answer.
  2. the cost of training staff to operate the machine
  3. the expected labour cost savings from using the machine
  4. the refundable GST charged on importation

Explanation

NZ IAS 16 includes import duties and directly attributable delivery costs in the cost of property, plant and equipment, because they are necessary to bring the asset to its location and working condition. Recoverable taxes, staff training and expected future savings are excluded.

Question 6Accounting concepts for an entity operating in a global environment

A New Zealand exporter expects to receive US$500,000 in six months and signs a forward exchange contract to sell those US dollars at a fixed rate. The main purpose of this transaction is to:

  1. transfer the credit risk on the receivable to the forward contract counterparty
  2. remove the uncertainty about the NZ dollar amount that will be received Correct answer.
  3. increase the NZ dollar value of the receivable if the NZ dollar weakens
  4. avoid recording the receivable in the statement of financial position

Explanation

A forward exchange contract fixes the rate at which foreign currency will be exchanged on a future date, so the exporter knows in advance the NZ dollar amount of the planned receipt. It is a hedging instrument that manages currency risk; the underlying sale and receivable are still recorded.

Question 7Accounting concepts for an entity operating in a global environment

A New Zealand exporter sells on credit in US dollars and does not hedge. Between the sale and the receipt of the US dollars the NZ dollar weakens against the US dollar, so NZ$1 buys fewer US dollars. For the exporter this movement produces:

  1. an exchange gain, because the US dollar receivable now converts into more NZ dollars Correct answer.
  2. a gain recognised in other comprehensive income rather than in profit or loss
  3. an exchange loss, because the US dollar receivable is now worth less in NZ dollars
  4. no exchange difference, because the sale was already recorded in NZ dollars at the original rate

Explanation

When the NZ dollar weakens, each US dollar received converts into more NZ dollars. The receivable is a monetary item retranslated at the closing rate, so the exporter recognises an exchange gain in profit or loss up to the date the funds are collected.

Question 8Accounting concepts for an entity operating in a global environment

A New Zealand company controls a subsidiary that operates in Australia and keeps its accounting records in Australian dollars. When the subsidiary's results are translated into NZ dollars for consolidation under NZ IAS 21, the exchange differences arising are:

  1. recognised in profit or loss in the year in which they arise
  2. adjusted against the carrying amount of the subsidiary's assets
  3. recognised in other comprehensive income only when the subsidiary is sold
  4. recognised in other comprehensive income and accumulated in a translation reserve Correct answer.

Explanation

Assets and liabilities of a foreign operation are translated at the closing rate and income and expenses at transaction-date rates. The resulting differences go to other comprehensive income and build up in a separate translation reserve within equity, and they are reclassified to profit or loss only on disposal of the operation.

Question 9Accounting concepts for an entity operating in a global environment

On 20 March a New Zealand retailer buys goods on credit for US$50,000 and the invoice remains unpaid at the 31 March balance date. The US dollar weakens against the NZ dollar between the two dates. Under NZ IAS 21 the effect is that:

  1. the inventory is reduced by the exchange difference and no gain is recognised
  2. no gain is recognised until the invoice is actually paid in the following month
  3. both the inventory and the payable are retranslated at the closing rate, so that the exchange difference nets to nil
  4. the payable is retranslated at the closing rate, giving an exchange gain, while the inventory stays at historical cost Correct answer.

Explanation

Inventory is a non-monetary item carried at historical cost, so it stays at the exchange rate applying on the transaction date. The trade payable is monetary and is retranslated at the closing rate; because the US dollar has weakened, fewer NZ dollars are needed to settle it and an exchange gain is recognised in profit or loss.

Question 10Accounting concepts for an entity operating in a global environment

A New Zealand parent company sells components to its wholly owned subsidiary in a country with a lower company tax rate and sets a low transfer price on those sales. Which statement best explains why tax authorities take an interest in this arrangement?

  1. Transfer pricing rules apply only to sales to unrelated customers, so the arrangement is outside the tax system
  2. Because both companies are members of the same group, the transaction is eliminated on consolidation and no tax issue arises
  3. Related-party prices must be on an arm's length basis, so profits cannot simply be shifted into the low-tax country Correct answer.
  4. The subsidiary's country will tax the parent's profit because the components were originally produced in New Zealand

Explanation

Transfer pricing rules require related parties to price transactions as independent parties would, which is the arm's length principle. A low transfer price leaves more profit in the low-tax country, so the tax authority in the parent's country may adjust the price and reassess tax on the profit that has been shifted away.

Question 11Accounting concepts for an entity operating in a global environment

Under NZ IAS 21, a non-monetary asset such as inventory that is denominated in a foreign currency and carried at historical cost is translated at balance date using which rate?

  1. The transaction-date exchange rate Correct answer.
  2. The average rate for the reporting period
  3. The forward rate available at balance date
  4. The closing rate at balance date

Explanation

Under NZ IAS 21, non-monetary items carried at historical cost are not retranslated at balance date. They remain measured using the exchange rate that applied on the date of the original transaction, so no later closing rate is applied.

Question 12Accounting concepts for an entity operating in a global environment

A New Zealand group translates the financial statements of its overseas subsidiary into NZ dollars for consolidation. Under NZ IAS 21, where does the exchange difference arising from translation normally go?

  1. To profit or loss as a foreign exchange gain or loss
  2. Directly to retained earnings as an adjustment
  3. To a foreign currency translation reserve within other comprehensive income Correct answer.
  4. To the cost of the subsidiary's assets as a basis adjustment

Explanation

NZ IAS 21 requires translation differences from converting a foreign operation's results into the presentation currency to be recognised in other comprehensive income. They accumulate in a separate component of equity, commonly called the foreign currency translation reserve.

Question 13Accounting concepts for an entity operating in a global environment

A New Zealand business sells goods to a customer in Australia and the goods are exported. For NZ GST purposes, how is the supply of those exported goods treated, assuming the business keeps the required export documentation?

  1. Exempt, so no GST return entry is needed
  2. Outside the scope of GST, so no supply is recorded
  3. Standard-rated at 15% because the customer is overseas
  4. Zero-rated, so GST is charged at 0% Correct answer.

Explanation

Exported goods are a zero-rated supply for NZ GST when the exporter keeps the required export documentation. GST is charged at 0%, and the sale is still recorded in the GST return as a zero-rated supply.

Question 14Accounting concepts for an entity operating in a global environment

When translating a foreign subsidiary's statement of financial position into the parent's presentation currency, which item is translated at the historical exchange rate rather than the closing rate?

  1. Inventory held for sale in the ordinary course
  2. Share capital contributed by the parent Correct answer.
  3. Long-term borrowings repayable in three years
  4. Trade payables denominated in the subsidiary's functional currency

Explanation

When translating a foreign operation, assets and liabilities are translated at the closing rate. Share capital and other equity items contributed at historical dates are translated at the historical rate applicable when they were recognised.

Question 15Accounting concepts for an entity operating in a global environment

A NZ company owns an investment property in the United Kingdom that is measured at fair value under NZ IAS 40 and is denominated in pounds sterling. At balance date the property is revalued. Under NZ IAS 21, the fair value is translated using the exchange rate at which date?

  1. The date the property was originally acquired
  2. The average rate for the reporting period
  3. The balance date, because all foreign currency balances use the closing rate
  4. The date the fair value was determined Correct answer.

Explanation

A non-monetary item measured at fair value in a foreign currency is translated at the exchange rate on the date the fair value was determined. The closing rate is not used simply because the asset is held at balance date.

Question 16Accounting concepts for an entity operating in a global environment

A NZ manufacturer opens a sales branch in Japan. The branch sells only products supplied by the NZ parent, prices are set in NZ dollars by the parent, and branch cash is remitted to NZ daily. Which currency is most likely the branch's functional currency under NZ IAS 21?

  1. A basket of yen and NZ dollars, weighted by sales volume
  2. NZ dollars, because it extends the parent's operations Correct answer.
  3. Japanese yen, because the branch operates in Japan
  4. US dollars, because international sales are usually denominated in US dollars

Explanation

The functional currency is the currency of the primary economic environment in which the branch operates. Because the branch's selling prices, supplies and cash flows are controlled by and remitted to the NZ parent, it operates as an extension of the parent and its functional currency is NZ dollars.

Question 17Accounting concepts for an entity operating in a global environment

A NZ company borrows US$2 million to finance construction of a qualifying asset. Under NZ IAS 23, how should exchange differences on the foreign currency borrowing be treated while construction is in progress?

  1. They are recognised in other comprehensive income until the asset is ready for use
  2. They are added to the foreign currency translation reserve and never recycled
  3. They are capitalised to the extent they are regarded as an adjustment to interest Correct answer.
  4. They must be recognised in profit or loss as they arise and cannot be capitalised

Explanation

NZ IAS 23 permits exchange differences on foreign currency borrowings to be treated as borrowing costs to the extent they are regarded as an adjustment to interest costs. While the qualifying asset is being constructed, those capitalisable differences are added to the asset's cost.

Question 18Accounting concepts for an entity operating in a global environment

A NZ exporter signs a forward exchange contract to hedge a highly probable sale in US dollars. The hedge is designated as a cash flow hedge and is highly effective. Under NZ IFRS 9, where is the effective portion of the gain or loss on the forward contract recognised?

  1. As an adjustment to the carrying amount of inventory
  2. In profit or loss immediately as a fair value gain or loss for the period
  3. In other comprehensive income until the sale affects profit or loss Correct answer.
  4. Directly in retained earnings as a prior period adjustment

Explanation

For a cash flow hedge that is highly effective, the effective portion of the hedging instrument's gain or loss is recognised in other comprehensive income. It is reclassified to profit or loss when the hedged sale affects profit or loss.

Question 19Accounting concepts for an entity operating in a global environment

A NZ parent sells its entire interest in an overseas subsidiary. A cumulative exchange gain has been recorded in the foreign currency translation reserve in respect of that subsidiary. On disposal, how is that cumulative gain treated under NZ IAS 21?

  1. It remains in the translation reserve and is never recognised in profit or loss
  2. It is used to adjust the carrying amount of the parent's remaining overseas assets
  3. It is transferred directly to retained earnings without affecting profit or loss
  4. It is reclassified from equity to profit or loss on disposal Correct answer.

Explanation

On disposal of a foreign operation, NZ IAS 21 requires the cumulative exchange differences recognised in other comprehensive income to be reclassified to profit or loss. The reclassification forms part of the gain or loss on disposal.

Question 20Accounting concepts for an entity operating in a global environment

When translating the statement of profit or loss of a foreign subsidiary into NZ dollars, which exchange rate is acceptable for income and expense items under NZ IAS 21?

  1. The forward rate for the next reporting period
  2. The historical rate for each item's original transaction date only
  3. An average rate that reasonably approximates transaction-date rates Correct answer.
  4. The closing rate at balance date for all income and expense items

Explanation

Income and expenses of a foreign operation are translated at the exchange rates at the dates of the transactions. NZ IAS 21 allows an average rate for the period when it is a reasonable approximation of those transaction-date rates.

Question 21Accounting concepts for an entity operating in a global environment

Under NZ IAS 21, the presentation currency of an entity operating in a global environment is best described as:

  1. the currency of the country in which the entity is incorporated
  2. the currency in which the entity's largest customer pays for goods
  3. the currency in which the entity's financial statements are presented Correct answer.
  4. the currency of the primary economic environment in which the entity operates

Explanation

NZ IAS 21 distinguishes functional currency from presentation currency. The presentation currency is simply the currency in which the financial statements are presented, and it can differ from the functional currency. It is not determined by the country of incorporation or by the currency used by major customers.

Question 22Accounting concepts for an entity operating in a global environment

Which of the following items is a monetary item for the purposes of NZ IAS 21?

  1. a long-term loan denominated in a foreign currency Correct answer.
  2. inventory held for sale in the ordinary course of business
  3. prepaid insurance for the coming year
  4. plant and equipment used in production

Explanation

A monetary item is an asset or liability to be received or paid in a fixed or determinable number of currency units. A foreign currency loan is monetary because it will be settled in a fixed number of currency units. Inventory, prepaid insurance and plant are non-monetary items.

Question 23Accounting concepts for an entity operating in a global environment

Under NZ IAS 21, exchange differences arising on retranslating a foreign currency monetary payable at balance date are recognised in:

  1. the cost of the related asset
  2. other comprehensive income
  3. profit or loss for the period Correct answer.
  4. a translation reserve within equity

Explanation

Exchange differences on monetary items are recognised in profit or loss in the period in which they arise. They are not deferred to other comprehensive income or added to the cost of an asset unless a specific borrowing cost rule applies. A translation reserve arises only on translating a foreign operation.

Question 24Accounting concepts for an entity operating in a global environment

A New Zealand parent lends long-term funds to its overseas subsidiary. The loan is not expected to be repaid in the foreseeable future and forms part of the parent's net investment in the subsidiary. In the consolidated financial statements, exchange differences on this loan are recognised in:

  1. goodwill arising on consolidation at acquisition
  2. the carrying amount of the investment in the subsidiary
  3. other comprehensive income Correct answer.
  4. profit or loss of the group for the period

Explanation

Under NZ IAS 21, a monetary item that forms part of a reporting entity's net investment in a foreign operation is treated specially. Exchange differences on that item are recognised in other comprehensive income and accumulated in a separate component of equity. They are reclassified to profit or loss only when the net investment is disposed of.

Question 25Accounting concepts for an entity operating in a global environment

A New Zealand company acquires all the shares of a UK subsidiary. The subsidiary's share capital of £100,000 was issued when the exchange rate was NZ$1 = £0.50. In the consolidated financial statements, the subsidiary's share capital is translated at:

  1. the historical rate when the shares were issued Correct answer.
  2. the closing rate at balance date
  3. the exchange rate at the date the parent acquired the subsidiary
  4. the average rate for the reporting period

Explanation

Share capital is an equity item that is translated at the exchange rate at the date it arose, which is the date the shares were issued. The parent's acquisition date is relevant for pre-acquisition reserves and goodwill, not for the subsidiary's share capital. Closing and average rates apply to assets, liabilities, income and expenses.

Question 26Accounting concepts for an entity operating in a global environment

A foreign subsidiary declares and pays a dividend to its New Zealand parent. For translation into the parent's presentation currency, the dividend is translated at the exchange rate on:

  1. the average rate for the year
  2. the closing rate at the reporting date
  3. the date the dividend is paid Correct answer.
  4. the date the subsidiary was acquired

Explanation

Under NZ IAS 21, dividends paid by a foreign operation are translated at the exchange rate on the date of payment. They are not translated at the closing rate or an average rate because they are transactions rather than balances. The acquisition date is used for pre-acquisition equity, not for dividends.

Question 27Accounting concepts for an entity operating in a global environment

A translation reserve arising on translating the financial statements of a foreign subsidiary is presented in the consolidated statement of financial position as:

  1. part of retained earnings
  2. a liability to the parent
  3. an intangible asset
  4. a separate component of equity Correct answer.

Explanation

Exchange differences on translating a foreign operation are recognised in other comprehensive income and accumulated in a separate component of equity, often called the foreign currency translation reserve. It is not a liability, an asset, or part of retained earnings. It remains in equity until the foreign operation is disposed of.

Question 28Accounting concepts for an entity operating in a global environment

A New Zealand company has a recognised US$ payable and enters a forward exchange contract that is designated as a fair value hedge of that payable. The hedge is highly effective. How are gains and losses on the forward contract and the hedged payable recognised?

  1. both in profit or loss Correct answer.
  2. both in other comprehensive income
  3. the forward in other comprehensive income and the payable in profit or loss
  4. the forward in profit or loss and the payable in other comprehensive income

Explanation

In a fair value hedge, the hedged item is adjusted for changes in fair value attributable to the hedged risk, and the hedging instrument is measured at fair value. Both gains and losses are recognised in profit or loss, which allows the offsetting effects to be reported together. Other comprehensive income is used for cash flow hedges, not fair value hedges.

Question 29Accounting concepts for an entity operating in a global environment

A New Zealand parent acquires a foreign subsidiary and recognises goodwill on acquisition. Under NZ IAS 21, how is that goodwill translated for consolidation?

  1. at the closing rate at each reporting date Correct answer.
  2. at the average rate for the period
  3. at the historical rate on the acquisition date
  4. at the rate on the date the goodwill is tested for impairment

Explanation

NZ IAS 21 requires goodwill and any fair value adjustments arising on acquisition of a foreign operation to be treated as assets and liabilities of the foreign operation. They are therefore translated at the closing rate at each reporting date. The historical rate is used for share capital and pre-acquisition reserves, not for goodwill.

Question 30Accounting concepts for an entity operating in a global environment

Under NZ IAS 21, a foreign operation is:

  1. any customer that is located outside New Zealand
  2. any transaction denominated in a currency other than the New Zealand dollar
  3. only a subsidiary that is incorporated in another country
  4. a subsidiary, associate, joint venture or branch based abroad Correct answer.

Explanation

A foreign operation is an entity whose activities are based in a country or currency other than that of the reporting entity. It can be a subsidiary, associate, joint venture or branch. It is not defined by the location of customers, by the currency of a transaction, or by incorporation alone.

Question 31Accounting concepts for an entity operating in a global environment

Under NZ IAS 21, which factor is most relevant when determining the functional currency of a New Zealand company that has operations in several countries?

  1. The currency that mainly influences the sales prices of its goods and services Correct answer.
  2. The currency in which the company's shares are traded on the NZX
  3. The currency in which the company's auditor issues its invoice
  4. The currency used by the company's largest institutional shareholder

Explanation

Functional currency is the currency of the primary economic environment in which the entity operates. NZ IAS 21 identifies factors such as the currency that mainly influences sales prices and the currency that influences labour, material and other costs. Share trading, investor location and auditor billing are not primary indicators of the economic environment.

Question 32Accounting concepts for an entity operating in a global environment

A New Zealand parent translates the financial statements of its Australian subsidiary into NZ dollars for consolidation. Which type of foreign exchange risk does this translation process create for the group?

  1. Interest rate risk
  2. Economic risk
  3. Transaction risk
  4. Translation risk Correct answer.

Explanation

Translation risk arises when a foreign operation's assets, liabilities, income and expenses are translated into the group's presentation currency. Exchange rate movements change the reported consolidated amounts even though they may not affect immediate cash flows. Transaction risk relates to actual foreign currency dealings, while economic risk concerns future competitiveness.

Question 33Accounting concepts for an entity operating in a global environment

A NZ company buys inventory from a US supplier for US$50,000 on 10 March, when the spot rate is NZ$1 = US$0.60. The company does not pay until 20 April. Under NZ IAS 21, at what rate should the purchase be initially recognised on 10 March?

  1. The spot rate on 10 March (NZ$1 = US$0.60) Correct answer.
  2. The average rate for the year ended 31 March
  3. The spot rate on 20 April when payment is made
  4. The closing rate at the company's 31 March balance date

Explanation

NZ IAS 21 requires a foreign currency transaction to be recorded initially using the spot exchange rate at the date of the transaction. Later exchange rate movements affect the monetary payable when it is retranslated at balance date and settled. The 20 April rate and the 31 March closing rate are relevant to later measurement, not initial recognition.

Question 34Accounting concepts for an entity operating in a global environment

A NZ company changes its functional currency from NZ dollars to Australian dollars because its primary economic environment has changed. Under NZ IAS 21, how should this change be accounted for?

  1. As a prior period error adjusted in opening retained earnings
  2. By revaluing all non-current assets to fair value on the change date
  3. Prospectively from the date of change, without restating prior periods Correct answer.
  4. Retrospectively, restating all prior period comparatives

Explanation

NZ IAS 21 requires a change in functional currency to be accounted for prospectively from the date of change. The entity translates all items into the new functional currency using the exchange rate at that date. It is not a prior period error and prior comparatives are not restated.

Question 35Accounting concepts for an entity operating in a global environment

A NZ company has a US$100,000 payable at 31 March, recorded at the 31 March closing rate. It settles the payable on 15 April at a different rate. How is the difference between the 31 March carrying amount and the amount paid on 15 April recognised?

  1. Directly in the translation reserve within equity
  2. As an adjustment to the cost of the inventory originally purchased
  3. As a prior period adjustment in the next financial year
  4. As an exchange difference in profit or loss in the period of settlement Correct answer.

Explanation

A foreign currency payable is a monetary item that is retranslated at each balance date. When it is settled, any further difference between its carrying amount and the amount paid is recognised as an exchange difference in profit or loss in the settlement period. It is not carried back to inventory cost or taken to the translation reserve.

Question 36Accounting concepts for an entity operating in a global environment

A NZ company imports raw materials from Indonesia. It pays the supplier in US dollars, plus overseas freight and New Zealand customs duty. Under NZ IAS 2, how should the freight and customs duty be treated?

  1. Deduct freight and customs duty from the cost of inventory
  2. Recognise freight and customs duty as a separate intangible asset
  3. Expense freight and customs duty in profit or loss as incurred
  4. Include freight and customs duty in the cost of inventory Correct answer.

Explanation

NZ IAS 2 requires the cost of inventory to include costs of purchase such as import duties and freight, as well as the purchase price. These costs are necessary to bring the inventory to its present location and condition. They are not expensed immediately or treated as an intangible asset.

Question 37Accounting concepts for an entity operating in a global environment

A NZ company hedges the purchase of a machine in euros with a forward contract designated as a cash flow hedge. The hedge is highly effective. When the machine is recognised, how is the accumulated gain or loss in other comprehensive income treated?

  1. Leave the accumulated gain or loss in other comprehensive income indefinitely
  2. Recognise the accumulated gain or loss immediately in profit or loss as a hedging gain or loss
  3. Transfer the accumulated gain or loss to retained earnings
  4. Remove the accumulated gain or loss from other comprehensive income and include it in the initial cost of the machine Correct answer.

Explanation

When a cash flow hedge of a forecast transaction results in the recognition of a non-financial asset, the accumulated gain or loss in other comprehensive income is removed and included in the asset's initial carrying amount. This is often called a basis adjustment. The amount is not left in equity indefinitely or recognised immediately in profit or loss.

Question 38Accounting concepts for an entity operating in a global environment

A NZ group operates in several countries. Under NZ IFRS 8, which disclosure is required about its geographical areas?

  1. Revenues from external customers and non-current assets, split between the country of domicile and foreign countries in total Correct answer.
  2. The profit before tax for each individual overseas branch
  3. The name of every customer in each foreign country
  4. Only the total revenue earned in New Zealand

Explanation

NZ IFRS 8 requires geographical information about revenues from external customers and non-current assets. These amounts are disclosed separately for the entity's country of domicile and for all foreign countries in total, if material. The standard does not require naming every customer or reporting profit before tax for each branch.

Question 39Accounting concepts for an entity operating in a global environment

A NZ parent disposes of 40% of its interest in a foreign subsidiary but retains control. A translation reserve exists for that subsidiary. Under NZ IAS 21, how should the translation reserve be treated on the partial disposal?

  1. Reclassify the proportionate share of the translation reserve to profit or loss Correct answer.
  2. Reclassify the entire translation reserve to profit or loss
  3. Transfer the entire translation reserve to retained earnings
  4. Leave the entire translation reserve in equity with no reclassification

Explanation

On a partial disposal of an interest in a foreign operation, the proportionate share of the cumulative exchange differences is reclassified from equity to profit or loss. The entire translation reserve is reclassified only when the foreign operation is disposed of in full. Retaining control does not prevent proportionate reclassification.

Question 40Accounting concepts for an entity operating in a global environment

A NZ company enters a forward exchange contract to speculate on movements in the US dollar. The contract is not designated as a hedging instrument. Under NZ IFRS 9, how should the forward contract be measured and where should fair value changes be recognised?

  1. At cost, with no remeasurement until settlement
  2. At fair value, with changes in other comprehensive income
  3. At fair value, with changes in profit or loss Correct answer.
  4. At the spot rate at balance date, with changes in equity

Explanation

A derivative that is not designated as a hedging instrument is measured at fair value, with fair value changes recognised in profit or loss. Other comprehensive income treatment is available only for qualifying effective cash flow hedges. Measuring at cost or using only the spot rate does not comply with NZ IFRS 9.

Question 41Accounting concepts for an entity operating in a global environment

Global entities often support the work of the IFRS Foundation mainly because a single set of reporting standards is expected to:

  1. remove all foreign currency risk from multinational transactions
  2. guarantee identical tax rules in every jurisdiction
  3. eliminate the need to consolidate overseas subsidiaries
  4. improve comparability of financial statements across countries Correct answer.

Explanation

A single set of high-quality reporting standards is intended to make financial statements more comparable across countries and to reduce the cost of preparing multiple reports. It supports global capital markets, but it does not remove currency risk, set tax rates, or replace consolidation.

Question 42Accounting concepts for an entity operating in a global environment

A New Zealand company's functional currency is the New Zealand dollar. It makes a sale denominated in Australian dollars. For NZ IAS 21, the Australian dollar is:

  1. foreign currency for the company Correct answer.
  2. functional currency for the customer
  3. reporting currency of the group
  4. presentation currency for the company

Explanation

NZ IAS 21 defines a foreign currency as any currency other than the entity's functional currency. Because the company's functional currency is the NZ dollar, the Australian dollar is a foreign currency for this transaction.

Question 43Accounting concepts for an entity operating in a global environment

A New Zealand company owes US$100,000 to a supplier, payable in three months, and has not hedged the amount. Which risk does the company face between the transaction date and settlement?

  1. translation risk only, because there is no overseas subsidiary
  2. interest rate risk, because the payable is a monetary item
  3. economic risk only, because the purchase price is fixed
  4. transaction risk, because the NZ dollar cost can change Correct answer.

Explanation

An unhedged foreign currency payable creates transaction exposure because the NZ dollar amount needed to settle it changes as the NZD/USD exchange rate moves. The exposure lasts until the payable is settled.

Question 44Accounting concepts for an entity operating in a global environment

A New Zealand parent supplies inventory to its overseas subsidiary. Under the arm's length principle, the transfer price for this transaction should be the price that:

  1. maximises group profit in the lowest-tax country
  2. unrelated parties would agree in a comparable deal Correct answer.
  3. is set by the subsidiary's local tax authority
  4. covers the parent's cost with no profit margin

Explanation

The arm's length principle requires related-party transactions to be priced as if the parties were independent and dealing in comparable circumstances. Tax authorities use this principle to prevent profit being shifted artificially between jurisdictions.

Question 45Accounting concepts for an entity operating in a global environment

A New Zealand company holds an investment property in another country. Its fair value is measured in the foreign currency at 30 September each year, which is not the balance date. Fair value gains are recognised in profit or loss. Under NZ IAS 21, the property is translated at the exchange rate on:

  1. date the fair value was measured Correct answer.
  2. date the property was originally acquired
  3. closing rate at the end of the reporting period
  4. average exchange rate for the reporting period

Explanation

For a non-monetary asset measured at fair value in a foreign currency, NZ IAS 21 uses the exchange rate at the date the fair value was determined. The gain or loss on the property and any related exchange difference are then recognised in profit or loss.

Question 46Accounting concepts for an entity operating in a global environment

When a New Zealand parent loses control of a foreign subsidiary and disposes of the entire investment, the cumulative exchange difference in the translation reserve relating to that foreign operation is:

  1. offset against issued share capital
  2. reclassified to profit or loss Correct answer.
  3. left in equity permanently
  4. transferred to goodwill

Explanation

On disposal of a foreign operation, NZ IAS 21 requires the cumulative exchange differences recognised in equity to be reclassified to profit or loss. They form part of the gain or loss on disposal in the period control is lost.

Question 47Accounting concepts for an entity operating in a global environment

Under NZ IFRS 8 Operating Segments, an entity identifies its operating segments primarily by reference to:

  1. the entity's internal management reporting Correct answer.
  2. legal entities in each country
  3. segments exceeding the 10% revenue threshold
  4. geographic regions only

Explanation

NZ IFRS 8 uses a management approach: operating segments are based on the internal reports regularly reviewed by the chief operating decision maker. Legal structure, geography alone, or the 10% threshold does not define the operating segments.

Question 48Accounting concepts for an entity operating in a global environment

A New Zealand company owns an overseas owner-occupied property measured at fair value. Revaluation gains on the property are recognised in other comprehensive income under NZ IAS 16. At balance date the property's fair value in the foreign currency has increased. Under NZ IAS 21, the exchange difference on retranslating the property is recognised in:

  1. the translation reserve, whatever the property gain treatment
  2. other comprehensive income, matching the property gain Correct answer.
  3. retained earnings, because the property is a non-monetary item
  4. profit or loss, because all exchange differences go to profit or loss

Explanation

For a non-monetary item measured at fair value, NZ IAS 21 recognises the exchange difference in the same component of equity or profit or loss as the gain or loss on the item. Because the revaluation gain is in other comprehensive income, the related exchange difference is also in other comprehensive income.

Question 49Accounting concepts for an entity operating in a global environment

A foreign operation's functional currency is the currency of a hyperinflationary economy. Before its financial statements are translated into the parent's presentation currency, NZ IAS 21 requires them to be:

  1. translated at historical rates without inflation restatement
  2. remeasured into the parent's functional currency at transaction-date rates
  3. translated at average rates and then restated for inflation
  4. restated under NZ IAS 29, then translated at closing rate Correct answer.

Explanation

NZ IAS 21 requires the financial statements of a foreign operation with a hyperinflationary functional currency to be restated under NZ IAS 29 before translation. They are then translated at the closing rate, which avoids mixing restated and unrestated amounts.

Question 50Accounting concepts for an entity operating in a global environment

A New Zealand company buys equipment from an overseas supplier for US dollars on credit. The equipment is measured at cost after initial recognition. Under NZ IAS 21, at later balance dates the equipment is:

  1. left at the exchange rate on the transaction date Correct answer.
  2. remeasured to fair value in NZ dollars each balance date
  3. retranslated at each balance date using the closing rate
  4. translated using the average rate each period

Explanation

Equipment measured at historical cost is a non-monetary item, so it is not retranslated at each balance date. It remains translated at the exchange rate on the transaction date, while any monetary payable is retranslated.