Chapter 8
A U.S.-based company has a foreign subsidiary that has the Mexican peso as its functional currency. The Mexican subsidiary recognizes in its Mexican peso income statement a foreign exchange gain on a Colombian peso account receivable. In preparing its consolidated income statement, the U.S. parent company should translate the Mexican subsidiary's foreign exchange gain into U.S. dollars using the
average-for-the-year exchange rate between the Mexican peso and U.S. dollar.
Under the current rate method of translation, revenues and expenses generally are translated at
the average-for-the-perod exchange rate.
Under the temporal method of translation, a foreign entity
can have a net asset or a net liability balance sheet exposure.
The net asset balance sheet exposure of a foreign entity can be hedged using a
foreign currency option. foreign currency forward contract. foreign currency note payable.
The accounting system must keep track of the acquisition date exchange rates related to those assets that are translated at
historical exchange rates under the temporal method.
Assets translated using a different exchange rate under the current rate method than under the temporal method include
intangible assets. property, plant and equipment.
In assessing the indicators provided by the FASB for determining the functional currency of a foreign entity, the FASB
provides no guidance with regard to how the indicators should be weighted.
When the temporal method of translation is appropriate, the resulting translation adjustment must be
recognized as a gain or loss in net income.
Under the temporal method, a gain on the sale of land in foreign currency (FC) is translated into parent company currency by multiplying the cash proceeds from the sale in FC by the exchange rate in effect on the date of sale and
subtracting the product of multiplying the cost of the land in FC by the exchange rate in effect when the land was acquired
Translation using the temporal method with remeasurement gains and losses recognized in net income is appropriate for those foreign entities
that are located in highly inflationary economies. that have the U.S. dollar as their functional currency.
The Canadian subsidiary of a U.S.-based company has an account receivable in British pounds. To report this account receivable in the U.S.-parent's consolidated balance sheet, the
the Canadian dollar translated amount for the British pound receivable should be translated into U.S. dollars using the current exchange rate. British pound receivable should translated into Canadian dollars using the current exchange rate.
Exposure to translation adjustment exists for those foreign currency balances that are translated at
the current exchange rate.
The indicators provided by the FASB for determining the functional currency of a foreign entity include
whether sales prices are directly affected by short-term fluctuations in the exchange rate. whether the foreign entity's cash flows directly affect the parent's cash flows. the currency in which the foreign entity obtains its financing.
Under the current rate method of translation, a gain on the sale of land should be translated at
the exchange rate on the date the land was sold.
In translating the financial statements of a foreign entity located in a hyperinflationary economy, IFRS requires
the foreign financial statements to be restated for inflation and then all restated balances are translated at the current rate.
The current rate method of translation assumes that a foreign subsidiary is
a net asset that is exposed to foreign exchange risk
Translating an asset on a foreign subsidiary's balance sheet at the current exchange rate results in
a positive translation adjustment when the foreign currency has appreciated. a negative translation adjustment when the foreign currency has depreciated.
