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13-1
13
13
Translation of Financial
Statements of Foreign Affiliates
Learning
Learning Objectives
Objectives
1.
2.
3.
4.
5.
Slide
13-3
Learning
Learning Objectives
Objectives
6.
7.
8.
9.
10.
Slide
13-4
Translation
Translation of
of Financial
Financial Statements
Statements
A U.S. company may be involved in foreign activities
through the operations of a:
branch,
subsidiary, or
investee company.
Accounting
Accounting for
for Operations
Operations in
in Foreign
Foreign Countries
Countries
A foreign subsidiary is consolidated if the parent company
owns, directly or indirectly, a controlling interest in the
voting stock of the subsidiary. Exceptions include:
The intent to control is likely to be temporary.
Control does not actually rest with the parent company.
Exchange restrictions.
Translating
Translating Statements
Statements of
of Foreign
Foreign Affiliates
Affiliates
The conversion from another currency into the currency of
the parent company is frequently called translation.
Translation Process
Financial
Statements in
Euros
Slide
13-7
Current Exchange
Rate
Historical
Exchange Rate
Financial
Statements in
U.S. Dollars
Translating
Translating Statements
Statements of
of Foreign
Foreign Affiliates
Affiliates
Translation Adjustment or Translation Gain or Loss
The difference between translating some accounts using
the current exchange rate and others using the historical
exchange rate.
Current standards require the translation gain or loss be
reported
currently in income or
Not a
Choice
Objectives
Objectives of
of Translation-SFAS
Translation-SFAS No.
No. 52
52
Functional Currency Concept
Objective of Translation - SFAS No. 52 [ASC 830-30]:
1.
2.
LO 2 Objectives of translation.
Translation
Translation Methods
Methods
Current rate method
Slide
13-10
Translation
Current exchange
rate.
Revenues and
expenses.
Translation
Translation Methods
Methods
Temporal Method
Monetary assets and liabilities
(cash, a/r, a/p).
Assets and liabilities carried
at historical cost.
Assets and liabilities carried
at current values.
Revenues and expenses
related to assets and
liabilities translated at
historical rates.
Other revenues and expenses.
Slide
13-11
Translation
Current exchange rate.
Identifying
Identifying the
the Functional
Functional Currency
Currency
The Functional Currency may be
1.
Slide
13-12
Cash flow
Expenses
Sales prices
Financing
Sales market
Intercompany transactions
Identifying
Identifying the
the Functional
Functional Currency
Currency
Review Question
Indicators that the local currency is also the functional
currency include all of the following except:
Slide
13-13
a.
b.
c.
d.
Translation
Translation of
of Foreign
Foreign Currency
Currency Financial
Financial Statements
Statements
Remeasurement is the process of translating the accounts
of a foreign entity into its functional currency when they
are stated in another currency.
Translation. Accounts measured in the functional currency
are translated into the reporting currency using the
current rate method.
Slide
13-14
Translation
Translation of
of Foreign
Foreign Currency
Currency Financial
Financial Statements
Statements
Accounts stated in local currency of foreign entity.
Is the foreign
economy highly
inflationary?
Functional
currency (FC) is
U.S. Dollar.
Is the FC the
U.S. dollar?
Yes
Remeasure to U.S.
dollars using
temporal method.
Slide
13-15
No
No
Is the FC the
local currency?
No
Remeasure to
FC using temporal
method.
Yes
Translate to
U.S. dollars using
current rate
method.
Translation
Translation of
of Foreign
Foreign Currency
Currency Financial
Financial Statements
Statements
Foreign Entity Operates in Highly Inflationary Economy
It is the Boards belief that the currency of a country
that has a highly inflationary economy has lost its utility as
a store of value and cannot be a functional measuring unit.
This means the foreign financial statements should be
translated using the temporal method.
Slide
13-16
Translation
Translation of
of Foreign
Foreign Currency
Currency Financial
Financial Statements
Statements
Foreign Entity in Economy that is Not Highly Inflationary
Functional currency must be identified. Translation process:
1.
2.
Slide
13-17
Temporal method.
Translation
Translation of
of Foreign
Foreign Currency
Currency Financial
Financial Statements
Statements
Books kept in
local currency
Local
currency
Remeasurement
Not
necessary
Temporal
method
Temporal
method
Functional
currency
Local
currency
U.S.
dollar
A third
currency
Translation
Current
rate method
Not
necessary
Current
rate method
U.S. dollar
Slide
13-18
U. S. dollars
Translation
Translation Current
Current Rate
Rate Method
Method
Current Rate Method
Slide
13-19
Translation
Paid-in capital
Historical rate
Beginning R/E
Dividends
Cumulative translation
adjustment
Translation
Translation Current
Current Rate
Rate Method
Method
Exercise 13-4: On January 1, 2008, Trenten Systems, a U.S.based company, purchased a controlling interest in Grant
Management Consultants located in Zurich, Switzerland.
Direct exchange rates for Swiss franc are:
Dollars per Franc
January 1, 2008
$.5987
.5321
.5654
.5810
Translation
Translation Current
Current Rate
Rate Method
Method
Exercise 13-4: (Current Rate Method)
Slide
13-21
Translation
Translation Current
Current Rate
Rate Method
Method
Exercise 13-4: Prepare a schedule to verify the translation
adjustment.
Swiss
Francs
Translation
Rate
30,000
$.5987
17,961
45,000
.5654
25,443
.5810
(8,715)
(15,000)
Slide
13-22
--60,000
34,689
.5321
31,926
(2,763)
Translation
Translation Current
Current Rate
Rate Method
Method
Review Question
Under the current method of currency translation, which
of the following balance sheet accounts is translated at
historical exchange rates?
Slide
13-23
a.
Cash
b.
Accounts Receivable
c.
Bonds Payable
d.
Common Stock
Translation
Translation Temporal
Temporal Method
Method
Temporal Method
Translation
Translation
Translation Temporal
Temporal Method
Method
Exercise 13-5: On January 1, 2008, Trenten Systems, a U.S.based company, purchased a controlling interest in Grant
Management Consultants located in Zurich, Switzerland.
Direct exchange rates for Swiss franc are:
Dollars per Franc
January 1, 2008
$.5987
.5321
.5654
.5810
Translation
Translation Temporal
Temporal Method
Method
Exercise 13-5: (Temporal Method)
Income Statement
Revenue
Operating expenses: depreciation
Operating expenses: other
Translation loss
Net income
Retained earnings 1/1
Dividends
Retained earnings 12/31
Slide
13-26
Swiss
Francs
75,000
(3,000)
(27,000)
45,000
10,000
55,000
(15,000)
40,000
Translation
Rate
0.5654
0.5987
0.5654
0.5987
0.5810
U.S. Dollars
42,405
(1,796)
(15,266)
(198)
25,145
5,987
31,132
(8,715)
22,417
Balance Sheet
Cash and receivables
Net property, plant, equipment
Total assets
55,000
37,000
92,000
0.5321
0.5987
29,266
22,152
51,418
Accounts payable
Common stock
Retained earnings
Total liab. & equity
32,000
20,000
40,000
92,000
0.5321
0.5987
17,027
11,974
22,417
51,418
Translation
Translation Temporal
Temporal Method
Method
Exercise 13-5: Prepare a schedule to verify the translation
gain or loss.
Swiss
Francs
Translation
Rate
(10,000)
$.5987(5,987)
75,000
.5654
42,405
(27,000)
.5654
(15,266)
Dividends
(15,000)
.5810
(8,715)
---
23,000
12,437
.5321
12,238
(199)
Financial
Financial Statement
Statement Disclosure
Disclosure
Companies are required to disclose certain items, as follows:
1.
2.
3.
Slide
13-28
LO 10 Required disclosure.
Date
Date of
of Acquisition
Acquisition
Illustration: Recall that on January 2, 2009, P Company
acquired for 2,000,000 francs an 80% interest in SFr. Company.
The direct exchange rate for francs on January 2, 2009, was
$.15. The entry to record the acquisition is
Investment in SFr Company
Cash
Slide
13-29
300,000
300,000
Date
Date of
of Acquisition
Acquisition
On January 2, SFr Company reported common stock of 960,000
francs, additional paid-in capital of 300,000 francs, and retained
earnings of 480,000 francs for a net asset balance of 1,740,000
francs. The difference between implied and book value in francs
and dollars is allocated to land and buildings.
Slide
13-30
After
After Acquisition
Acquisition
P Company accounts for its investment by the cost method. In this
case, SFr Company declared and paid a 300,000 franc dividend on
September 1 when the direct exchange rate was $.16. The book
entry to record the dividend receipt is:
Cash
38,400
Dividend income
(300,000 francs x $.16 = $48,000 x .80 = $38,400)
Slide
13-31
38,400
After
After Acquisition
Acquisition
Workpaper entries assuming current rate method.
Slide
13-32
Consolidation
Consolidation Assuming
Assuming Temporal
Temporal Method
Method
The major differences between the workpapers are as follows:
1.
2.
Slide
13-33
Remeasurement
Remeasurement and
and Translation
Translation of
of Transactions
Transactions
SFAS No. 52 [ASC 8302020] defines a foreign currency
transaction as one that is denominated in a currency other than
the entitys functional currency.
1.
Intercompany
Intercompany Receivables
Receivables and
and Payables
Payables
SFAS No. 52 [ASC 83020351] requires that transaction
gains and losses on intercompany receivables and payables be
recognized in the period that the exchange rate changes.
The procedures for doing so are similar to those discussed in
the preceding section.
However, a company is required to distinguish between
transactions that are of a long-term investment nature and
other transactions.
Slide
13-35
Elimination
Elimination of
of Intercompany
Intercompany Profit
Profit
Profits and losses attributable to intercompany sales or
transfers are eliminated on the basis of the exchange rate at
the date of each sale or transfer.
The use of averages or reasonable approximations of specific
rates in effect on the due date of each transaction is
permitted.
Slide
13-36
Liquidation
Liquidation of
of aa Foreign
Foreign Investment
Investment
Upon the sale of part or all of an investment in a foreign entity,
a pro-rata share of the amount included in the accumulated
translation adjustment equity account associated with that
foreign investment is removed and reported as part of the gain
or loss from the disposition of the investment.
Slide
13-37
Copyright
Copyright
Copyright 2011 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.
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