Chartered Financial Analyst (CFA) Practice Exam Level 2

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In multi-national operations, what does remeasurement involve?

(Functional Currency) to (Local Currency)
(Reporting Currency) to (Functional Currency)
(Local Currency) to (Reporting Currency)
(Local Currency) to (Functional Currency)

The correct answer is: (Functional Currency) to (Local Currency)

Remeasurement in multi-national operations specifically refers to the process of converting financial statements from the local currency of a foreign operation into the functional currency. This is essential for financial reporting purposes, especially when preparing consolidated financial statements for a parent company managing operations abroad. The functional currency is typically the currency of the primary economic environment in which the subsidiary operates. Remeasuring from the local currency to the functional currency helps ensure that the financial information accurately reflects the economic realities of the subsidiary. This process may involve adjustments for inflation, exchange rate fluctuations, and other economic factors that impact the valuation of assets and liabilities. By focusing on this conversion, companies maintain a consistent basis for financial reporting that allows for enhanced comparability and accuracy within the group's financial statements. Additionally, recognizing the importance of functional currency helps stakeholders understand the true financial performance and position of subsidiaries within the global context.