A



Summary of both translation procedures

1 Adjustments are imperfect

2 Variety of rates

3 Results cannot be exact

4 Net result is an approximation

5 Adjustments are basically a sophisticted plug

1 Temporal method – historical rates designed to maintain old values in a new world

2 Current method – mix of beginning average and ending rates so that translation is a plug

3 On sale results could leave a shadow of the foreign sub

1 Translation leftover is removed

2 Adds to gain or loss on sale

3 Per SFAS 52 – “In the period in which sale or liquidation occurs, the cumulative translation adjustment reklated to the particular entity must be removed from other comprehensive income and reported as part of the gain or loss on sale of the investment.”

4 Removes plug due to ‘prior to sale’ adjustments

Relationships among currencies under SFAS 52

1 Companies may do business in several currencies

2 Different currencies for different firms

3 Coca Cola has about 60 currencies

4 Company currencies

1 All parts of a company have a local currencies

2 Local currency can be the reporting currency – US GAAP - dollars

3 Local currency can be a functional currency – major foreign currency for firm – permanent presence in firm

1 Cash Flow indicators – in functional currency

2 Sales related indicators – local economic forces

3 Expense indicators

4 Financing indicators – local sources

5 Intercompany relationship indicators – not strong

6 Functional currency can also be a reporting currency

7 U.S. currency is also a functional currency

4 Local currency can be a truly local currency – minor foreign currency for firm – could have temporary presence in firm

1 Company is not heavily invested in area

2 Sales office

3 Sales in other currencies

4 Reliance on other countries for funding

Relationships among a company’s currencies

1 Can go from truly local currency to functional currency to reporting currency

1 If sales branch is an extension of foreign operation and foreign operation has to be translated to US dollars.

2 First, remeasurement into functional currency

3 Impacts income of major foreign sub

4 Then, translate into reporting currency

5 Translation affects shareholders’ equity

2 Special Case - Hyperinflation (100% in 3 years)

1 Treat all activities as temporary

2 Use truly local currency approach

3 Irrespective of nature of presence in country

4 All decreases in value due to hyperinflation go to income statement

1 Hyperinflation of foreign currency like strengthening of dollar

2 Reduces income

3 Foreign assets still functional and important to foreign country

4 Use of historical rate (temporal approach) preserves asset value

1 PPE has same (unamortized) value despite inflation

2 Appropriate in foreign country

3 May not be in US

5 If hyperinflation ends

1 May use local currency as functional currency

2 Now much lower conversion rate

3 Old PPE value retained intiailly by inflating orignal cost to compensate

4 (New Value = Old Value/ratio of new rate to old rate)

6 Use of current rate would cause asset to go toward zero

3 Result of the remeasurement and translation activities

1 All accounts are affected

2 Sometimes schedules in 10-K statement show effects on selected accounts

1 Cash is affected

2 Cash flow statement is an activity statement

3 Flows translated at average rate

4 Large discrete transactions translated at rate at time in question

5 Difference based on transactions from ending position is the translation adjustment

Investment in foreign companies

1 Purchases

1 Foreign currency is functional currency – fair values translated at current rate

2 Dollar is functional currency – fair values translated using temporal method

2 Pooling (old poolings)

1 Foreign currency is functional currency – book values translated at current rate

2 Dollar is functional currency – book values translated using temporal method

Consolidating foreign subsidiaries

1 Intercompany accounts have to be eliminated

2 Average rate adjustments may not work

3 S informs P of the transactions recorded

4 Foreign amounts are given dollar values of the offsetting accounts on the parent’s books

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