CT ch. 8

The two major issues related to the translation of foreign currency financial statements are

(1) which method should be used, and (2) where should the resulting translation adjustment be reported in the consolidated financial statements

when functional currency is US dollar

TEMPORAL method -- gain/loss in income

Application of the Lower of Cost or Market rule - temporal method

Temporal -> Foreign currency cost and foreign currency market value of the inventory to be translated into parent currency at appropriate market exchange rates. And the LOWER of the parent currency cost or parent currency market value is reported on consolidated B/S.

cumulative translation adjustment in stockholder's equity

The alternative to reporting the translation adjustment as a gain or loss in net income is to include it in stockholders' equity as a component of other comprehensive income This treatment defers the gain or loss in stockholders' equity until it is realized in some way Current rate

in translating the FS of foreign subsidary in the parents currency under the current rate method , which of the following statements is true?

The translation adjustment is a function of the foreign subsidary;s net assets

current/noncurrent method - other info

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

translation gain or loss in net income

Translation adjustment is considered to be a gain or loss analogous to the gains and losses arise from foreign currency transaction Should be reported in income in the period in which the fluctuation in exchange rate occurs Temporal

When foreign currency depreciates, a net asset exposure results in a

a negative translation adjustment

a foreign subsidary has one asset (inventory) and no liabilites . THe subsidary operates with sig degree of autonomy from company and primarily uses the local currency in caryring out its transactions. since the date of inventory was acquired , the won has decreased in value in relation to companys reporting currency. in translating the foreign subsidary's peso FS into the parents reporting currency which of the following is true?

a negative translation adjustment musy be reported in SE

Companies that have foreign subsidiaries with highly integrated operations use

temporal method

which method of translation maintains in the translated FS, the underlying valuation methods used in foreign currency FS?

temporal method

Translation adjustment can be

1. gain or loss reported immediately in net income, 2. separate component of stockholders equity (OCI) ... this will depend on which translation method is used (current or temporal)

2 steps for IFRS

1. sales price 2. currency - labor, material, providing goals, services

CR method summary

@ current rate --- result in net ASSET exposure --- translation LOSS --- adjustment included in equity

current/noncurrent method - CA/CL translated at

current exchange rate

monetary/nonmonetary method - monetary A/L translated

current exchange rate

temporal method - Items carried on subsidiary's books at current value are translated as

current exhange rate

Translation methods (4)

current/noncurrent method monetary/nonmonetary method temporal method current rate method

US GAAP requires identification of

functional currency... the primary currency of the foreign subsidary's operating envioronment

current/noncurrent method- noncurrent assets and liabilites and sotckholders accounts are translated at

historical exchange rates

current rate method - equity accounts are translated

historical exchnage rates

monetary/nonmonetary moethod - nonmonetary A/L and stockholders equity translated

historical exhcahnge rate

Foreign country operations usually prepare financial statements using

local currency as the monetary unit

in accordance with US GAAP which translation combo would be appropriate for a foreign operation whose funcational currency is the US dollar

method - temporal treatment - gain or loss in income statement

When foreign currency appreciates, a net liability exposure results in a

negative translation adjustment

monetary/nonmonetary method 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

B/S Assets and liabilities translated at the historical exchange rate are

not exposed to a translation adjustment

When foreign currency appreciates, a net asset exposure results in a

positive translation adjustment

When foreign currency depreciates, a net liability exposure results in a

postive translation adjustment

temporal method summary

primarily monetary A/L are translated at the current rate --- results in net LIABILITY exposure --- translation GAIN --- included in current income

current rate method - objective

reflect that the parent's entire investment in a foreign subsidiary is exposed to exchange risk

which of the following items is normall translaed the same way under both the current rate and temporal mthods or translation? inventory equip sales revenue depreciation expense

sales revenue

Keeping track of the historical rates for inventory, prepaid expenses, fixed assets, and intangible assets is necessary under

temporal method NOT current rate

temporal method - income statement items translated at

the exchange rate in effect at the time of the transaction - average rate

which of the following best explains how a translation loss arises when the temporal method of translation is used to translate the foreign currency FS of a foreign subsidary

the foreign subsidary has more monetary assets than monetary liabilites and the foreign currency depreciates in value

the functional currency of GAraland Inc Japan subsidarry is the japan yen. GAraland borrowed japan yen as a partial hedge of its investment in the subsidary. how should the transaction gain on the forgein currency borrowing be reported in GAralands consolidated FS

the transaction gain is offset against the negative translation adjustment related to japan subsidary in the SE section of the BS

Calculation of Cost of Goods Sold (COGS)

there is no single exchange rate that can be used to translate COGS for temporal method. Need to break out Beginning Inventory (Historical), + Purchases (average ER for year) - Ending inventory (historical ER) = COGS

temporal method - objective

translate financial statements as if the subsidiary had been using the parent's currency

B/S : Assets and liabilities translated at the current exchange rate

exposed to risk of a translation adjustment

List for IFRS

1. financing activities 2. receipts from operations

when functional currency is foreign

CURRENt rate method -- gain/loss in S.equity

functional currency

Cash flow Sales price - ST basis Sales market - active? Expenses Financing Intercompany transactions

fixed assets - current rate

Current ER. Depreciation -> average ER

Application of the Lower of Cost or Market rule - Current rate method

Current rate method -> Current exchange rate

temporal method - items carried on subsidary;s books at historical cost

Including all stockholders'equity items (translated at historical exchange rates) - same as current rate

stock holders equity items are translated at

at historical exchange rates under both the temporal and current rate methods - creates a problem in trnaslation of retained earnins

current rate method - A/L translated

at the current exchange rate

current rate method - revenues and expenses are translated at

at the exchange rate in effect at the date of accounting recognition (usually the average-for-the-period exchange rate)

If all assets and liabilities of a firm's foreign subsidiary are translated into the parent's currency at the current exchange rate (the rate in effect at the date of the balance sheet), the extent of the parent firm's translation gain or loss is based up the subsidiary's - If all assets and liabilities of a firm's foreign subsidiary are translated into the parent's currency at the current exchange rate (the rate in effect at the date of the balance sheet), the extent of the parent firm's translation gain or loss is based up the subsidiary's - a. Current assets minus current liabilities b. Total assets minus total liabilities. c. Monetary assets minus monetary liabilities d. Operating cash flows

b. Total assets minus total liabilities.

Company J is located in the U.S., but has subsidiaries in Germany. When the euro depreciates relative to the U.S. $, what is the direction of the translation adjustment to consolidate Company J's F/S? a. When there is a net asset exposure, the translation adjustment will be positive b. When there is a net liability exposure, the translation adjustment will be positive. c. The direction of the adjustment is indeterminable d. There will be no adjustment necessary unless the difference is realized

b. When there is a net liability exposure, the translation adjustment will be positive.

fixed assets - temporal

different historical exchange rates on each item

Losses negatively affect

earning

both gains and losses increase

earnings volatility These gains and losses result from the combination of balance sheet exposure and exchange rate fluctuations