Topic 3: Translation of Foreign Currency Financial Statements

Treatment of Translation Adjustment Temporal Method

gain or loss in net income

Temporal Method 1. Primarily __________________ assets and liabilities are translated at ________ rate. 2. This results in net ___________ exposure. 3. Net ___________ exposure and devaluing foreign currencies result in a translation ___________. 4. Translation ________ included in _______________ ____________.

monetary, current, liability, liability, gain, gain, current income

A company's functional currency is the _________________ currency of the foreign entity's operating environment.

primary

If a foreign operation's functional currency is the US dollar, the currency balances must be ___________ into US dollars using the ____________ method resulting in ___________________ _________ (and) _________.

remeasured, temporal, remeasurement gains and losses

The currency in which the entity prepares its financial statements is called the __________________.

reporting currency

EXCEPTION: in highly inflationary economies, the ______________ method for translation is required.

temporal

Functional Currency: US Dollar _______________ method _______________ required

temporal, remeasurement

If a foreign currency is the foreign operation's functional currency, the currency balances must be ____________ using the ___________________ method and a _______________ ____________ is reported on the _____________ _____________.

translated, current rate, translation adjustment, balance sheet

Two major theoretical issues are: which ________________ method should be used and; where the resulting translation ____________________ should be reported in the consolidated financial statements

translation, adjustment

What are the two major translation methods are currently used?

current rate, temporal

Functional Currency: Foreign Currency _______________________ method _______________________ required

current rate, translation

Current Rate Method 1. All _____________ and ____________ are translated at current rate. 2. This results in net _________ exposure. 3. Net __________ exposure and devaluing foreign currency results in a translation _________. 4. Translation ________________ included in __________.

assets, liabilities, asset, asset, loss, adjustment, equity

In comparing the translation and the remeasurement process, which of the following is true? a. the reported balance of inventory is normally the same under both methods. b. the reported balance of equipment is normally the same under both methods. c. The reported balance of sales is normally the same under both methods. d. The reported balance of depreciation expense is normally the same under both methods.

c.

What is a subsidiary's functional currency? a. the parent company's reporting currency b. the currency in which transactions are denominated c. the currency in which the entity primarily generates and expends cash d. always the currency of the country in which the company has its headquarters

c.

Which of the following statements is true for the translation process (as opposed to remeasurement)? a. A translation adjustment can affect consolidated net income. b. Equipment is translated at the historical exchange rate in effect at the date of its purchase. c. A translation adjustment is created by the change in the relative value of a subsidiary's net assets caused by exchange rate fluctuations. d. A translation adjustment is created by the change in the relative value of a subsidiary's monetary assets and monetary liabilities caused by exchange rate fluctuations.

c.

To prepare worldwide consolidated financial statements a US parent must: 1. ______________ the foreign GAAP financial statements of its foreign operations into US GAAP and; 2. ____________ the financial statements from the foreign currency into US dollars.

convert, translate

Treatment of Translation Adjustment Current Rate

deferred in OCI

Translation Method Objectives: Current: parents __________ ____________ is exposed to risk. Temporal: as if the ____________ had been _____________ the parent currency

entire investment, subsidiary, using