Question #57 - Reading 23 Residual Income Valuation

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 29

Status: Unattempted

Correct Answer: A

Shared Context

- Is Chair correct in his stated concerns? A) Incorrect in both. B) Correct in Statement 1 only. C) Correct in Statement 2 only.

Question

Which of the accounting policy note extracts identified by Chair would cause an issue with the "clean surplus relationship" when using the residual income model for Topper Inc.?

Answer Choices:

A. Foreign Subsidiaries note

B. Financial Instruments note

C. Both the Foreign Subsidiaries and the Financial Instruments note

Explanation

Foreign exchange gains and losses calculated under the current rate method are taken directly to shareholders' equity (CTA). This violates the clean surplus relationship and should be adjusted for unless they are expected to reverse in the near future. Only assets held as "fair value through other comprehensive income (FVOCI)" would cause an issue in the financial instruments note.

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