Chapter 8: translation of foreign currency financials

Two major issues

1. Foreign financial statements must be restated into the parent company's GAAP 2. Foreign financial statements must be translated into the parent company's currency using one of the allowable methods

To determine temporal cost of goods sold

Beg. Inventory x (beg. In. ER) Purchases x (average ER) (Ending inventory) x (end in. ER) = COGS

What are the different translation methods

Current rate method Temporal method

Current rate income statement rule

Items are translated at the average exchange rate for the current period

To determine current rate cost of goods sold

Look at FC balance of cogs and if it's end inventory the use that ER and if it's the beg. Balance then use that ER

In preparing consolidated financial statements for a multinational company what must be done

The foreign currency financial statements prepared by foreign subsidiaries must be restated and translated into the parent company's currency

Functional currency

The primary currency of the foreign entity's operating environment It can be the parent company's currency or a foreign currency (generally the local currency)

Where do the resulting translation gains or losses get adjusted to in temporal method

The remeasured gain or loss must be reported immediately in the income statement as foreign currency translation gain or loss

Where do the resulting translation gains or losses get adjusted to in current rate

They are deferred and included in stockholders equity as a separate component called cumulative translation adjustment until the foreign entity is disposed of

Current rate dividends rule

Translated at the prevailing exchange rate at the time of dividend distribution

Temporal method dividends rule

Translated at the prevailing exchange rate at the time of dividend distribution

Temporal method

Used if the functional currency is the same as the reporting currency

Current rate method

Used when the functional currency is different from the parents currency

In current rate to determine cost of goods sold using only given end inventory

Written down to its market value - use current rate Evaluate at cost which is lower than market - use historical cost

Current rate balance sheet rules

1. All assets and liabilities are translated at the current exchange rate 2. Stockholders equity is translated at the historical exchange rate

Temporal method balance sheet rule

1. Assets carried at current or future value and all liabilities are measured at the current exchange rate 2. Assets carried at historical cost and stockholders equity accounts are measured at historical exchange rates

Temporal method income statement rule

1. Expenses related to assets measured at historical exchange rates are pre-measured using the same rates 2. Other income statement items are pre-measured using the average exchange rate for the period