Chapter 12 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

What is a transaction?

A transaction that records the gain or loss of foreign currency into U.S. Dollars. When they occur measure any gain or loss in P&L at time of conversion.

How do you calculate Retained Earnings under the current rate method and temporal method? (It is the same way for both methods).

Beg. of Year (per prior year) + income per above - dividends (historical) = End of year

Rate for cost of goods sold?

Beginning Inventory at rate used end of prior year for ending inventory Plus: Purchases at average annual rate Less: Ending Inventory at rate used to acquire ending inventory = Cost of Goods Sold

The translation (current rate) method of foreign currency translation uses: a. change in accumulated comprehensive income to adjust income from subsidiary in current year b. total accumulated comprehensive income to adjust income from subsidiary in the current year c. neither of the above d. both of the above

C

Example of a transaction: Parent (or sub) Sell $140,000 of goods on credit to Euro customer at time exchange rate is 1.4 to 1. So Buyer would owe €100,000 to settle. If before settlement the exchange rate changed to 1.3 to 1, thus we would later receive €100,000 whose value is then $US 130,000. At time of balance sheet or receipt record loss.

Dr. Cash 130,000 Dr. Loss on foreign currency exchange 10,000 Cr. A/R 140,000

When the local currency of a foreign subsidiary is the "functional currency," the foreign subsidiary's INVENTORY, carried at cost, would be converted to U.S. Dollars (of the parent) using:

translation (current rate method) using current exchange rates

Dividends declared by a foreign subsidiary are converted under the TEMPORAL (RE-MEASUREMENT) using:

the exchange rate in effect on the date the dividend was declared

True or False: RE translation under the current rate method consists of translating the beginning RE using the beginning of the year translated balance plus income computed translating subsidiary income using average translation rate for the year less dividends using the current rate at the end of the fiscal year.

False

What conversion rates are used for each type of assets under each method?

For assets under the current rate method, always use current rate for all assets. For assets under the temporal method, use the current rate for Cash and A/R and Mkt. Securities T and AFS. For all other assets under the temporal method, use the historical rate.

What conversion rates are used for each type of liabilities under each method?

For liabilities under either method, use the current rate. There is one exception: deferred income under temporal method uses the historical rate.

What conversion rates are used for each type of income statement account under each method?

For the current rate method, for the I/S accounts, they all use AVERAGE. For the temporal method, revenues and most expenses are also average, however, the rest of the accounts under temporal are historical.

How do you find the average rate for final inventory acquisition?

Generally avg. rate of last few months

How do you calculate the Current Rate?

Rate in effect on date of translation (end of year)

What are the historical rates to consider?

Rate in effect when ASSET acquired Rate in effect when DEBT acquired Rate in effect when DIVIDEND DECLARED Rate in effect when significant isolated event occurs

What conversion rates are used for each type of stockholder's equity items under each method?

Stockholder's Equity is treated exactly the same for both methods. All SE accounts are historical except for the Retained Earnings which is composite.

IF Functional Currency is the U.S $, then use which method?

The Temporal Method - where balance sheet is translated using combination of historical rates and current rates and gains/losses on translation are recognized in Net Income.

MONETARY balance sheet amounts should be converted from LCU to U.S. dollars as follows:

Translation method: current exchange rate Re-measurement method: current exchange rate

CS and PIC should be converted from LCU to U.S. Dollars as follows:

Translation method: historical exchange rate Re-measurement method: historical exchange rate

EXPENSES should be converted from LCU to U.S. Dollars as follows:

Translation method: weighted average exchange rate Re-measurement method: weighted average exchange rate