ACCA · Question 29 · Preparation of Consolidated Financial Statements
SECTION B
CASE SCENARIO: Quantum Logistics Group acquired 100% of the equity of a foreign subsidiary, Velocity Trans, on 1 January 20X9. Quantum paid $5,000,000 in cash and agreed to pay further contingent consideration in two years. The present value of this contingent consideration at acquisition was $1,000,000. At acquisition, Velocity Trans had an internally generated brand not recognized in its financial statements, with an estimated fair value of $2,000,000. The applicable tax rate is 20%. Velocity Trans is currently defending a legal claim from a customer. Quantum's legal team estimates a 60% probability of losing and paying $3,000,000, and a 40% probability of losing and paying $1,000,000. Velocity Trans's functional currency is the Dinar, while Quantum's is the Dollar.
QUESTION: When translating Velocity Trans's financial statements into Dollars at the year-end, which exchange rate should be used to translate its net assets (assets and liabilities)?
Answer options:
The historical rate at the date of acquisition.
The average rate for the year.
The closing rate at the reporting date.
A weighted average of the historical and closing rates.
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