international ch 8/ 9

under the temporal method which accounts are multilplied by the current exchange rate? 5

-cash and receivables -marketable securties -inventory at market -current liabilities -long term debt

Current/Noncurrent Method

Current assets and liabilities are translated at the current exchange rate - Noncurrent assets and liabilities and stockholders' equity accounts are translated at historical exchange rates - There is no theoretical basis for this method - Method is seldom used in any countries and is not allowed by U.S. GAAP or IFRS

because liabilities usually are greater than assets translated at current rates....

a net liability exposure generally exitsts when using the temporal method

under the current rate method, which accounts are multiplied by the current rate

all assets and liabilities -SHE= historical

under the current rate method, which accounts are multiplied by the average rate

all income statement items (rev, exp, COGS, depreciation, amortization)

when the assumption can be made that revenue or expenses are made/ incurred evenly throughout the accounting period

an avergae for the period xchange rate can be used for translation

nonlocal currency balances italian sub (euros) borrowed money from swiss (francs)

any accounts demoninated in another foriegn currency (francs) must be restated into euros then translated to US$

under the temporal rate method COGS is found how

beginning inventory in FC* historical ER from date acquired + purchases in FC * avg ER, in year purchased if made evenly - ending inventory * historical ER or if purchased evenly throughout a month use avg rate

under monetary/ non monetary method an asset exposure exists when

cash + receivables are greater than payables

under monetary/ non monetary method an net liability exposure exists when

cash + receivables are less than than payables

look up ex on ppt slides 13-21

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assets and liabilities translated at which rate are exposed to risk of a translation adjustment?

current

when a translation adjustment is negative, is it a debit or credit?

debit

current rate method distorts which ratios

distorts ROE because income was translated at avg rate and equity at current rate -any ratio that combines IS and BS items will be distorted

dividends are translated at which rate

exchaange rate that exists on declaration date

under the temporal method, income statement items are translated at

exchange rates that exist when the revenue is generated or exp is incurred

transaction exposure

gives rise to foriegn exchange gains and losses that are ultimately realized in cash

as foreign curreny appreciates, the value of foriegn currency dividends received from the foreign company....

increases

under the temporal method which accounts are multilplied by the historical exchange rate? 9

inventory at cost (On BS) -prepaid exp -PPE -intangibles -deferred income -all SHE -COGS -dep -amort

look at list of indicators pg 417 to identify functional currency

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some exp such as COGS, dep of fixed assets and amortization of intangibles are related to assets carried at historical cost, so which rate must be used?

must be translated at historical xchange rates

application of lower of cost or market rule under the temporal method

requires the foreign currency cost and foriegn currency market value of ending inventory to be translated into parent currency at appropiate xchnage rates, and the lower of the parent currency cost or parent currency market value is reported in the consolidated BS -can be carried at cost on foriegn BS and MV on consolidated BS

under the temporal rate method, which accounts are multiplied by the average rate

revenues and most exp

Under IAS 21, when a foreign sub has a functional currency different from the reporting currency of the parent

the financial statements should be translated using the current method with translation adjustment reporrted in AOCI BS

net asset exposure... treated with what type of translation adjustemtn

total assets at BS date are greater than liabilities - create a line item negative translation adjustment (debit) to balance (thats when SHE makes liabil and equity greater than assets)

dep exp and acc dep under current method

translated at avg year 2 exhcnage rate of 1.4* 1000= $1400 acc dep= FC1200 * 1.5= 1800

Under IAS 21, when a foreign sub has a functional currency the same as the reporting currency of the parent (same for GAAP)

translated using temporal method, with resulting translation adjustment reported currently as a gain or loss in inome

under the current rate method COGS is found how

using the avg for the period rate COGS in FC * avg ER= COGS in PC

monetary assets are assets

whose value does not fluctuate over time -cash -receivables

is it possible for a foriegn sub to have one functional currency under GAAP and another under IFRS?

yes

Current Rate Method

-Objective is to reflect that the parent's entire investment in a foreign subsidiary is exposed to exchange risk -All assets and liabilities are translated at the current exchange rate -Equity accounts are translated at historical exchange rates -Revenues and expenses are translated at the exchange rate in effect at the date of accounting recognition -when rev/ exp are incurred evenly avg rate is used

Temporal Method 4

-Objective is to translate financial statements As if the subsidiary had been using the parent's currency - Items carried on subsidiary's books at historical cost Including all stockholders' equity items, are translated at historical exchange rates -Items carried on subsidiary's books at current value are translated at current exchange rates - Income statement items are translated at the exchange rate in effect at the time of the transaction

monetary liabilities

-dont fluctuate -most payables

nonmonetary assets

-value fluctuates -marketable securities -inventory -prepaid exp -investments -fixed assets -intagibles -all other except cash and receivables

the Eb in RE on the BS an d in the statement of RE must reconcile -find net income by subtracting div from RE -income reported on stm of RE and on IS must also reconcile -the remeasurment gain or loss is what balances all three statements under temporal method

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only a few events actually change net assets: 4

net income div stock issuance acquisition of treasury stock

-euro per franc Jan 1, 2013 = .8 avg 2013= .82 dec 31, 2013= .85 dollar per euro Jan 1, 2013 = 1.35 avg 2013= 1.3 dec 31, 2013= 1.25 Italco borrows 100,000 swiss francs on 1/1/y1 and has a 100,000 franc note payable

on december 31, year 1 remeasure: 100,000 francs *.85= 85,000 euros Italco also recognizes a foriegn exchange loss of 5000 euros (100,000 franc * (.85-.8) on note payable for consolidation: 85,000 euro * 1.25= 106,250 note payable 5000* 1.3 (A)= 6500 foriegn exchange loss reflected in NI

for foriegn subs whose functional currency is the currency of a hyperinflationary economy, IAS 21 requires

the parent to first restate the the foreign financials for inflation using IAS 29 rules 2. translate statements into parent co currency using the current exchange rate - ALL BS and IS accounts are translated at current rate (even SHE)

Monetary/Nonmonetary Method

Concerns with monetary assets and liabilities - Translated at the current exchange rate Concerns with nonmonetary assets and liabilities and stockholders' equity accounts -Translated at historical exchange rates -The translation adjustment measures the net foreign exchange gain or loss on current assets and liabilities as if these items were carried on the parent's books

fixed assets acquired at different times must be translated

at different (historical) exchange rates -same is true for dep and acc dep

computation/ translation of RE

Beginning RE + net income (translated per method used to trnaslte income stm items) - DIv in FC *historical exchange rate when declared = ending RE

computation of remeasurment gain/ loss for temporal method

- BS exposure is defined by its net monetary asset or liability position net monetary assets 1/1/Y1 + increase in monetary items (sales) -decrease in monetary items purchases of inv selling/ admin exp interest exp income taxes purchase of prop (all at correct rates/ avg if spread equally) div (dec rate) = net monetary liabilities (asset)1 * current exchange rate 2 net monetary liabilities(A) - net monetary L (A) @ current exchaneg rate= remeasurment gain if 1 is larger than 2= gain

translation adjustment could be RELIZEd as a gain or a loss under the temporal method under 2 circumstances

1. foreign cub collects all receivables in yen cash adn then uses its cash to pay off liabilities to extent possible 2. if there is a net asset exposure, the excess of cash over liabilities is remitted to the parent, where it is converted into parent currency OR if there is a net liabiity exposure, the parent snds parent currency to its foriegn sub which is converted into foriegn currency to pay remaining liabilities

computation of trnaslation adjustment current method

1. net asset balance of sub at beg of year is translated at the exchange rate in effect on that date (1/1 year 1 rate) (look on beg BS) 2. increases and decreases to net asset balance are translated at the rates when in/ decreases occur 3. sum all above numbers to find net asset balance 12/31, year 1 4. ending net asset balance is translated at current exchaneg rate 5. subtract steps 3-4 if step 3 is greater than 4= a negative debit translation adjustment rises -if 4 is greater than 3 a positive vredit adjustment arises ex pg 424

A net liability balance sheet exposure exists when

1. the foreign currency appreciates (negative translation adjustment) 2. foreign currency depreciates (positive translation adjustment)

A net asset balance sheet exposure exists when

1. the foreign currency appreciates (positive translation adjustment) 2. foreign currency depreciates (negative translation adjustment)

dep exp for year 2 under temporal method would be

200 * $1= 200 800 * $1.2= 960 FC 1000 = $1,160

acc dep for year 2 under temporal method would be

400 * 1= 4000 800 * $1.2= 960 FC 1200= $1360

under the current rate method, equipment would be reporte on DEc 31, year 2 BS at

5000 X 1.5= 7500

a co purchases a piece of equipment on Jan 1, year 1 for FC1000 when the exchange rate is $1 per FC. Another item is purchased Jan 1 year 2 for FC4000 when exchange rate is $1.20 per FC1. both have a five year useful life. under temporal, the amount at which equipment would be reported on the consolidated BS on Dec 31, year 2 when the echange rate is $1.50 per FC would be:

FC1000 * $1= 1000 FC4000 * $1.2= 4800 FC 5000 = $5800

FASB ASC 830, Foreign Currency Matters( formerly SFAS 52, Foreign Currency Translation) how to choose where to place your translation adjustment and which translation method to use

Requires identification of functional currency -Functional currency is the primary currency of the foreign subsidiary's operating environment -The standard includes a list of indicators as guidance for the foreign currency decision -When functional currency is U.S. Dollar, temporal method is required with gain or loss presented in income -When functional currency is foreign currency, current rate method is required with gain or loss included in AOCI on BS

translation adjustments

arise from BS exposure and dont result in cash inflows or outflows

temporal method distorts all ratios

as measured in the foreign currency -sub appears to be more liquid less highly leveraged less profitable than it does in euro terms