Chapter 10 - Advanced Accounting

The temporal method requires translating property, plant, and equipment acquired at different times at different

(historical) exchange rates

A country has a highly inflationary economy when its cumulative three year inflation exceeds

100 percent (With compounding, it equates to an average of 26 percent per years for 3 years)

AOCI

Accumulated Other Comprehensive Income

Translation exposure gives rise to

foreign exchange gains and losses that are ultimately realized in cash

A credit is recognized by a

gain

Under the temporal method, assets and liabilities are carried on the foreign operation's balance sheet at

historical cost and are translated at historical exchange rates to yield an equivalent historical cost in U.S. dollars

Under the temporal method for remeasurement, land, patents, inventory, prepaid expenses, and intangible assets are carried at

historical rate

The temporal method translates the Cash account at the exchange rate on the date of sale, and the Land account is translated at the

historical rate (this is used to calculate the gain or loss on sale)

Stockholders' equity items are translated at

historical rates

Translation methods differ as to which balance sheet and

income statement accounts are translated at historical exchange rates and at current exchange rates

If the foreign currency increases in value, an

increase in the U.S. dollar value of the net asset occurs and will be reflected through a positive (credit balance) translation adjustment

A debit is recognized by a

loss

Liabilities translated at the current exchange rate when the foreign currency has appreciated generate a

negative (debit) translation adjustment

Assets translated at the current exchange rate when the foreign currency has appreciated generate a

positive (credit) translation adjustment

If the U.S dollar is the functional currency, we use the

temporal method

Remeasurement process is associated with the

temporal method

In highly inflationary economies, the

temporal method for translation is required with remeasurement gains or losses reported in net income

To measure the net investment's exposure to foreign exchange risk, all assets and liabilities of the foreign operation are translated at

the current exchange rate

Historical Exchange Rate

the exchange rate that existed when a transaction occured

Current Exchange Rate

the exchange rate that exists at the balance sheet date

Bonds payable is remeasured using the current exchange rate under

the temporal method

Net assets =

total assets - total liabilities

When the U.S. dollar is the functional currency, U.S. GAAP requires remeasurement

using the temporal method with remeasurement gains and losses reported in income

Ending R/E in FC =

Beginning R/E in FC + Net Income in FC - Dividends in FC

COGS in U.S. $ =

COGS in Foreign Currency x Average Exchange Rate

net realizable value

Expected selling price of an item - the cost of making the sale.

FC

Foreign Currency

Reporting currency

The currency in which an entity prepares its financial statements, U.S. based companies use the U.S. dollar

The two major translation methods are:

The current rate (or closing rate) method or the temporal method (back to historical rate)

Under the current method, what are the effects of a negative translation adjustment and a foreign exchange gain in its consolidated financial statements?

Translation adjustments less the foreign exchange gains are reported in accumulated other comprehensive income on the balance sheet

Under the temporal method for remeasurement,

accounts receivable are carried at current rate

Under the current rate method, COGS in foreign currency is translated using the

average-for-the-period exchange rate

The temporal method remeasures cash, receivables, and liabilities into U.S. dollars using the

current exchange rate

Long-term debt is translated at the

current exchange rate under the temporal method

Translation process is associated with the

current method

If the foreign currency is the functional currency, we use the

current rate method

If the foreign currency decreases in value against the U.S. dollar, a

decrease in the U.S. dollar value of the foreign currency net asset occurs

The current rate method translates the gain on sale of land at the

exchange rate in effect at the date of sale