Pedro Ruiz is an analyst for a credit rating agency. One of the companies he follows, Eurexim SA, is based in France and complies with International Financial Reporting Standards (IFRS). Ruiz has learned that Eurexim used EUR220 million of its own cash and borrowed an equal amount to open a subsidiary in Ukraine. Th e funds were converted into hryvnia (UAH) on 31 December 20X1 at an exchange rate of EUR1.00 = UAH6.70 and used to purchase UAH1,500 million in fixed assets and UAH300 of inventories.
Ruiz is concerned about the effect that the subsidiary’s results might have on Eurexim’s consolidated
financial statements. He calls Eurexim’s Chief Financial Officer, but learns little. Eurexim is not willing to share sales forecasts and has not even made a determination as to the subsidiary’s functional currency.
Absent more useful information, Ruiz decides to explore various scenarios to determine
the potential impact on Eurexim’s consolidated financial statements. Ukraine is not currently in a hyperinfl ationary environment, but Ruiz is concerned that this situation could change. Ruiz also believes the euro will appreciate against the hryvnia for the foreseeable future.
Based on the information available and Ruiz’s expectations regarding exchange rates, if the hryvnia is chosen as the Ukraine subsidiary’s functional currency, Eurexim will most likely
A. an addition to the cumulative translation adjustment.
B. a translation gain or loss as a component of net income.
C. a subtraction from the cumulative translation adjustment.