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Translation of
Foreign
Currency
Financial
Statements
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Worldwide 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.
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Worldwide Consolidated
Financial Statements
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.
Two major related theoretical issues are:
(1) which translation method should be used and
(2) where the resulting translation adjustment
should be reported in the consolidated financial
statements.
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Translation Methods:
Temporal and Current Rate
Two major translation methods are currently used:
(1) the current rate (or closing rate) method and
(2) the temporal method.
Each method is presented from the perspective of a
U.S.based multinational company translating
foreign currency financial statements into U.S.
dollars.
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Functional Currency
To determine whether a subsidiary is integrated with
the parent or operates independently, we look at the
functional currency.
A companys functional currency is the primary
currency of the foreign entitys operating environment.
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Determining Subsidiarys
Functional Currency
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Temporal Method
If the subs functional currency is the US
dollar, 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.
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Temporal Method
The 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.
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Temporal Method
In 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.
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Consolidation Worksheet
with Foreign Subsidiary
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Translation Adjustment
with Foreign Subsidiary
When the foreign currency is the functional currency, the
excess is translated at the current exchange rate with a
resulting translation adjustment. Neither the parent nor the
subsidiary has recorded the translation adjustment related to
the excess, and it also must be entered in the consolidation
worksheet.
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