Chartered Financial Analyst (CFA) Practice Exam Level 2

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Which method is used to translate monetary assets for an independent subsidiary?

Current rate method
Temporal method
ACR method
Historical method

The correct answer is: ACR method

The correct answer is the ACR method, which stands for the All-Current Rate method. This method is specifically used to translate monetary assets and liabilities into the presentation currency for an independent subsidiary. Monetary assets, such as cash, receivables, and payables, are translated using the current exchange rate as of the balance sheet date. In this context, the ACR method ensures that the values of those monetary assets reflect the most current exchange rates, providing an accurate representation of their value in the reporting currency. The ACR method is appropriate for independent subsidiaries, as they do not require adjustments related to their own functional currency. Other methods are generally employed for different types of assets or under different circumstances. For example, the current rate method is often used for the overall translation of financial statements, while the temporal method is applied for entities that operate in a hyperinflationary environment or when translating non-monetary items. The historical method is applicable mainly to historical cost accounting but does not specifically pertain to the translation of monetary assets.