14 - 0 advanced accounting by debra jeter and paul chaney chapter 14: translation of financial...
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Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 14: Translation
of Financial Statements of
Foreign Affiliates
Slides Authored by Hannah Wong, Ph.D.Rutgers University
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Foreign Subsidiaries
A foreign subsidiary is consolidated if the parent company owns a controlling interest in the subsidiary
Exceptions: The intent to control is temporary Control does not rest with the parent
government restrictions on asset withdrawal
exchange restrictions
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Translating Financial Statements of Foreign Affiliates
Translation: the conversion of financial statements from one currency to another
Financial statements in Franc
Financial statements
in U.S. dollars
Translation
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Exchange Rates
Current exchange rate
= the spot rate on the balance sheet date
Historical exchange rate
= the spot rate on the transaction date
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Functional Currency
Definition:
Functional currency of a foreign affiliate is the currency of the economic environment in which it primarily conducts its operations
can be: local currency of the affiliate the U. S. dollar a third currency
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Translation Methods
Current Rate Method
all assets and liabilities are translated using the current exchange rate
revenues and expenses - average exchange rate
Temporal Method
monetary assets and liabilities - current exchange rate
assets and liabilities carried at historical cost - historical exchange rate
assets and liabilities carried at current value - current exchange rate
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Functional Currency Indicators
cash flows
sales prices
sales market
expenses
financing
intercompany transactions
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Determining Functional Currency
Accounts stated in local currency of foreign affiliate
Function currency = U.S. $
Foreign economy highly inflationary?
Do economic indicators show that functional
currency = U.S. $?
Function currency = local currency
Function currency = U.S. $
Yes Yes
No
No
Remeasurement Remeasurement Translation
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Remeasurement VS Translation
Remeasurement
convert financial statement elements using temporal method
translation adjustment included in net income
Translation
convert financial statement elements using current rate method
translation adjustment recorded in stockholders equity
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Translation Process
Books kept in local currency
Local currency
Financial statements in U. S. dollars
Not necessary
A third currency
U.S.dollar
Not necessary
Temporal method
Temporal method
Current rate method
Current rate method
Local currency
U.S. dollar
Functional currency
Remeasure-ment
Translation
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Translation (Current Rate Method)
Assets and liabilities
Paid-in capital:purchase acquisition
Paid-in capital: pooling acquisition
Current exchange rate
Historical rate on the date of acquisition
Historical rate on the date of capital transaction of subsidiary
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Translation (Current Rate Method)
Beginning R/E
Dividends
Revenue and
expenses
Cumulative
translation adjustment
= Ending balance of last year
Historical rate when dividend is declared
Average exchange rate
= Balance amount in the balance sheet
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Translation (Current Rate Method)
Cumulative translation adjustment
Current yeartranslation adjustment
= Balance amount in the balance sheet
“Other comprehensive income” in shareholders equity
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Remeasurement (Temporal Method)
Monetary assets and liabilities carried at current values
Nonmonetary assets and liabilities carried at current values
Nonmonetary assets and liabilities carried at historical costs
Current exchange rate
Current exchange rate
Historical rate on the date of transaction
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Remeasurement (Temporal Method)
Paid-in capital:purchase acquisition
Paid-in capital: pooling acquisition
Historical rate on the date of acquisition
Historical rate on the date of capital transaction of subsidiary
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Remeasurement (Temporal Method)
Beginning R/E
Dividends
= Ending balance of last year
Historical rate when dividend is declared
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Remeasurement (Temporal Method)
Revenues and expenses related to assets and liabilities translated at historical rates (inventory cost and depreciation)
Other revenues and expenses
Historical rate used for the related asset or liability accounts
Average exchange rate
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Remeasurement (Temporal Method)
Current yeartranslation adjustment
Net income
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Financial Statement Disclosure
Aggregate translation gain/loss included in net income disclosed in (notes to) financial
statement
Exchange rate changes that occur after the balance sheet date and their effect on unsettled foreign currency transactions, if significant
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Financial Statement Disclosure
Analysis of the cumulative translation adjustment should be presented as part of statement of
changes in equity or
in a separate statement
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Financial Statement Disclosure
Analysis of the cumulative translation adjustment includes beginning and ending amounts current period’s aggregate adjustment
translation of foreign currency statementsgains/losses from hedging activities and
intercompany long-term investment transactions
income taxes allocated amount transferred to net income
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.