question archive In relation to the following case situations, discuss whether you regard the reporting entity as exposed to foreign exchange gains and losses in relation to the foreign entity
In relation to the following case situations, discuss whether you regard the reporting entity as exposed to foreign exchange gains and losses in relation to the foreign entity
Subject:BusinessPrice: Bought3
In relation to the following case situations, discuss whether you regard the reporting entity as exposed to foreign exchange gains and losses in relation to the foreign entity.
Case A: A foreign operation extracts mineral ores that are shipped to Australia for processing at the parent entity’s smelters. All senior personnel at the foreign operation are parent entity employees. Monthly invoices for ore supplied to the parent are denominated in US dollars. The parent entity pays these invoices with US dollars obtained by selling its finished product to US customers, thus taking advantage of a natural hedge. Payments to the foreign operation cover all running costs but long-term financing is provided by the parent entity
Case B A foreign operation extracts a mineral product that it exports worldwide. The sales price is subject to daily fluctuations. The Australian parent regards the operation as an investment only but the extreme volatility of the foreign operation’s sales prices impacts on the price of the parent’s shares on the Australian stock exchange because the investment in the foreign operation is one of the parent’s significant assets
