14 - 0

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
14 - 1
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
14 - 2
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
14 - 3
Exchange Rates
Current exchange rate
= the spot rate on the balance sheet date

Historical exchange rate
= the spot rate on the
transaction date

14 - 4
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
14 - 5
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

14 - 6
Functional Currency Indicators
cash flows
sales prices
sales market
expenses
financing
intercompany transactions
14 - 7
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
14 - 8
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
14 - 9
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
14 - 10
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

14 - 11
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
14 - 12
Translation (Current Rate Method)

Cumulative
translation
adjustment

Current year
translation
adjustment


= Balance amount in
the balance sheet


Other comprehensive
income in
shareholders equity
14 - 13
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
14 - 14
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

14 - 15
Remeasurement (Temporal Method)
Beginning R/E

Dividends




= Ending balance of
last year

Historical rate when
dividend is declared
14 - 16
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

14 - 17
Remeasurement (Temporal Method)

Current year
translation
adjustment



Net income
14 - 18
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
14 - 19
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


14 - 20
Financial Statement Disclosure
Analysis of the cumulative translation
adjustment includes
beginning and ending amounts
current periods aggregate adjustment
translation of foreign currency statements
gains/losses from hedging activities and
intercompany long-term investment transactions
income taxes allocated
amount transferred to net income

14 - 21

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.