Kế toán, kiểm toán - Chapter ten: Franslation of foreign currency financial statements

Chapter TenTranslation of Foreign Currency Financial Statements Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinWorldwide Consolidated Financial Statements To prepare worldwide consolidated financial statements a U. S. parent must:(1) convert the foreign GAAP financial statements of its foreign operations into U.S. GAAP and (2) translate the financial statements from the foreign currency into U.S. dollars. This conversion and translation process is required whether the foreign operation is a branch, joint venture, majority-owned subsidiary, or affiliate accounted for under the equity method. 10-*Translation Methods: Temporal and Current Rate LO 1Two major translation methods are currently used: (1) the current rate (closing rate) method and (2) the temporal method. 10-*Treatments for Translation AdjustmentThe two major translation methods and the two possible treatments for the translation adjustmentgive rise to four possible combinations:10-*Two Translation CombinationsSome subs use a U.S. dollar perspective to translation, so most of their transactions are recorded in U.S. dollars using the temporal method. Other subs use the local currency perspective; they operate relatively independent of their U.S. parents and use the current rate method for translation. Translation adjustment appears in the equity section. LO 210-*Functional CurrencyTo determine whether a subsidiary is integrated with the parent or operates independently, we look at the functional currency.A company’s functional currency is the primary currency of the foreign entity’s operating environment. 10-*Highly Inflationary EconomiesIn highly inflationary economies, the Temporal Method for translation is required.A country has a highly inflationary economy when its cumulative three year inflation exceeds 100 percent. With compounding, it equates to an average of approximately 26 percent per year for three years in a row. A country may or may not be classified as highly inflationary, depending on its most recent three-year experience with inflation.10-*Current Rate MethodLO 3Under the current rate method, all revenues and expenses are translated at the exchange rate in effect at the date of accounting recognition. The weighted average exchange rate is used when revenues and expenses have been recognized evenly throughout the year. However, when an income account, such as a gain or loss, occurs at a specific point in time, the exchange rate as of that date is applied. Depreciation and amortization expenses also are translated at the average rate for the year. These expenses accrue evenly throughout the year even though the journal entry could be delayed until year-end for convenience.10-*Temporal Method If the sub’s functional currency is the US $, then any balances denominated in the local currency, must be remeasured.Remeasurement requires the application of the temporal method.The remeasurement gain or loss appears on the income statement.LO 410-*Temporal MethodThe temporal method remeasures cash, receivables, and liabilities into U.S. dollars using the current exchange rate. Inventory, property and equipment, patents, and contributed capital accounts are remeasured at historical rates resulting in differences in total assets and liabilities plus equity which must be reconciled resulting in a remeasurement gain or loss. 10-*Temporal MethodIn remeasuring the statement of cash flows, the U.S. dollar value for net income is taken from the remeasured income statement. Depreciation and amortization are remeasured at the rates used in the income statement, and the remeasurement loss, a noncash item, is added back to net income. Increases in accounts receivable and accounts payable, related to sales and purchases, are remeasured at the average rate. The increase in inventory is determined by the remeasurement of cost of goods sold. 10-*Nonlocal Currency BalancesIf any accounts of the foreign subsidiary are denominated in a currency other than the local currency (or the US$), they would first have to be restated into the local currency.Both the foreign currency balance and any related foreign exchange gain or loss would then be translated (or remeasured) into US$.10-*Hedging Balance Sheet ExposureTranslation adjustments and re-measurement gains / losses arise from: (1) Exchange rate changes and (2) Balance sheet exposureBalance sheet exposure can be hedged through derivatives (forward contracts or foreign currency options) or through nonderivative instruments (foreign currency borrowings).Ironically, in seeking to avoid unrealized translation adjustments, realized foreign exchange gains and losses can occur!LO 510-*Consolidation of a Foreign SubsidiaryThe initial step in consolidating the foreign subsidiary is to translate its trial balance from British pounds into U.S. dollars. Because the British pound is the functional currency, the translation uses the current rate method. The historical exchange rate for translating Bradford’s common stock and January 1, 2012, retained earnings is the exchange rate that existed at the acquisition date—$1.51.LO610-*Consolidation Worksheet withForeign SubsidiaryLO 710-*