高级会计学英文版资料：Chap010 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

1、Chapter 10Translation of foreign Currency financial statementsChapter OutlineI.In todays global economy, many companies have invested in operations in foreign countries. A.In preparing consolidated financial statements on a worldwide basis, the foreign currency accounts prepared by foreign operation

2、s must be restated into the parent companys reporting currency.There are two major issues related to the translation of foreign currency financial statements.1.Which method should be used? How should the resulting translation adjustment be reported on the consolidated financial statements?C.Translat

3、ion methods differ on the basis of which accounts are translated at the current exchange rate and which are translated at a historical exchange rate. Translating accounts at the current exchange rate creates a translation adjustment.D.Historically, accountants have experimented with a number of diff

4、erent translation methods. The dominant methods currently in use are the temporal method and the current rate method. Translation adjustments can be either (1) reported as a gain or loss in income or (2) deferred in the stockholders equity section of the balance sheet. The primary objective of the t

5、emporal method is to maintain the underlying valuation method used by the foreign entity to account for its assets and liabilities.A.Assets and liabilities carried at current or future value are translated at the current exchange rate. Assets and liabilities carried at cost and stockholders equity i

6、tems are translated at a historical exchange rate.B.By translating some assets at the current exchange rate and others at historical rates the temporal method distorts financial ratios calculated in the foreign currency. C.Most income statement items are translated at average-for-the-period rates. H

7、owever, cost-of-goods-sold, depreciation, and amortization expense are translated at relevant historical exchange rates.D.Balance sheet exposure under the temporal method is defined as cash, marketable securities, and receivables minus total liabilities. A net liability exposure often exists.1.When

8、a liability balance sheet exposure exists, depreciation of the foreign currency results in a positive translation adjustment (gain) and appreciation of the foreign currency results in a negative translation adjustment (loss).2.Reporting a translation loss when the foreign currency appreciates is tho

9、ught to be inconsistent with economic reality. With the current rate method, the net investment in a foreign operation is considered to be exposed to foreign exchange risk.A.Assets and liabilities are translated at the current exchange rate; equity is translated at historical rates. B.Translating as

10、sets which are carried at cost using the current exchange rate results in a translated value which is not readily interpretable; it is neither a current value nor a historical cost.C.However, translating all assets at the current rate does maintain underlying ratios and relationships that exist in t

11、he foreign currency statements.D.Revenues and expenses which occur evenly throughout the period are translated at the average-for-the-period exchange rate. Income items, such as gains and losses, which are the result of a discrete event, are translated at the actual exchange rate on the date of occu

12、rrence. Balance sheet exposure under the current rate method is equal to the foreign entitys net assets (stockholders equity).1.Appreciation in the foreign currency results in a positive translation adjustment (gain); depreciation results in a negative translation adjustment (loss). FASB Accounting

13、Standards Codification Topic 830, Foreign Currency Matters, (FASB ASC 830) provides guidelines for the translation of foreign currency financial statements by U.S.-based multinational corporations. The appropriate translation method and disposition of translation adjustment depends upon the function

14、al currency of the foreign entity.A.The functional currency is the primary currency of the foreign entitys operating environment. It can be either the U.S. dollar or a foreign currency.1.U.S. GAAP lists six indicators that are to be used in determining an entitys functional currency. There are no gu

15、idelines as to how these indicators are to be weighted.B.If a foreign currency is the functional currency, the foreign entitys financial statements are translated using the current rate method and the resulting translation adjustment is reported as a separate component of equity. The average-for-the

16、-period exchange rate is used to translate the foreign entitys income statement. 1.Upon the sale or liquidation of a specific foreign entity, the cumulative translation adjustment related to that entity is taken to income as an adjustment to the gain or loss on sale or liquidation. C.If the U.S. dol

17、lar is the functional currency, foreign currency financial statements are remeasured using the temporal method with remeasurement gains and losses reported in operating income. D.If a foreign entity operates in a highly inflationary economy (cumulative three-year inflation greater than 100%), its fi

18、nancial statements are remeasured into U.S. dollars using the temporal method and remeasurement gains and losses are reported in income.V.Some companies hedge the balance sheet exposures of their foreign entities so as to avoid adverse effects on income and/or stockholders equity. A.FASB Accounting

19、Standards Codification Topic 815, Derivatives and Hedging (FASB ASC 815) refers to this as a hedge of a net investment in a foreign operation and stipulates that gains and losses on hedging instruments used in this manner should be treated in the same fashion as the translation adjustment (remeasure

20、ment gain/loss) being hedged. B.The paradox of hedging balance sheet exposure is that by avoiding a translation adjustment (remeasurement gain/loss), realized foreign exchange gains and losses can arise. Answer to Discussion Question: How Do We Report This?This case represents the ongoing debate as

21、to the proper reporting of foreign currency balances. Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of three assets. The relative value of the vilsek has now changed. Thus, 150,000 vilseks now can be converted into $34,500. However, the subsidiary does not have vilsek

22、s-only land, inventory, and investments. Although the current exchange rate is given, the company has no apparent plans to convert its assets into dollars. Instead, these three assets are being held, each with a historical cost of 150,000 vilseks. Under the temporal method, these assets (except for

23、the investments if carried at market value) would be reported in the parents balance sheet at the original cost of $30,000. Unfortunately, as the Finance Director points out, an old, outdated rate is being utilized if the $30,000 figure is reported. (Of course, given that prices tend to change over

24、time, the same can be said for any asset reported at historical cost.)Conversely, the current rate method requires that each of the three assets be reported at $34,500 based on the current exchange rate. As the controller indicates, though, $34,500 was not the original cost expended by Southwestern.

25、 In addition, using the current rate means that each of the assets will constantly report a floating value, one that will change with each exchange rate fluctuation. Finally, the $34,500 figure is based on the current value of the vilsek ($.23) and the historical cost in vilseks (150,000 vilseks) fo

26、r the three assets. The current exchange rate is only significant if the assets are sold with the proceeds being converted into U.S. dollars. Since an imminent sale is not indicated, the validity of reporting the $34,500 might again be questioned. In addition, even if the assets were sold, $34,500 d

27、oes not accurately reflect the proceeds in U.S. dollars because 150,000 vilseks is the historical cost and not the current market value of each of these assets.As a classroom exercise or written assignment, students could be required to select a reported value for each of the three assets and then d

28、efend their position. What figure is actually the fairest representation of each of the three assets? What figure is the best conveyor of information to an outside party? There is no single best answer to these questions. The purpose of this type of exercise is to encourage students to consider the

29、objectives of financial reporting. Students should not just assume that the current official pronouncement is correct. One possible approach to the case is to assign several students to represent banks or stockholders and discuss the types of information that is most needed by these users. Another g

30、roup of students can take the position of the company responsible for preparing the information and discuss managements preference for providing one type of information over another. Yet another group could take a purely theoretical approach and discuss the goals that accounting has attempted to rea

31、ch. Although a final resolution may not be achieved, some excellent class discussion is possible. The temporal and current rate methods of translation differ primarily with regard to the exchange rate used to translate those assets that are reported at historical cost-inventories, prepaids, fixed as

32、sets, and intangibles. The debate regarding the appropriate exchange rate for translating assets exists only because some assets are reported at historical cost. If all assets were reported at their current value, there would be no need to use the historical exchange rate for translating assets in o

33、rder to maintain the assets historical cost in U.S. dollar terms. All assets would be translated at the current exchange rate. The differences between the temporal method and current rate method would disappear. Answers to Questions1.The two major issues related to the translation of foreign currenc

34、y financial statements are: (a) which method should be used and (b) where should the resulting translation adjustment be reported in the consolidated financial statements. The first issue relates to determining the appropriate exchange rate (historical, current, or average for the current period) fo

35、r the translation of foreign currency balances. Those items translated at the current exchange rate are exposed to translation adjustment. The second issue relates to whether the translation adjustment should be treated as a gain or loss in income, or should be deferred as a separate component of st

36、ockholders equity.2.Balance sheet exposure arises when a foreign currency balance is translated at the current exchange rate. By translating at the current exchange rate, the foreign currency item in essence is being revalued in U.S. dollar terms on the consolidated financial statements. There will

37、be either a net asset balance sheet exposure or net liability balance sheet exposure depending upon whether assets translated at the current rate are greater or less than liabilities translated at the current rate. Balance sheet exposure generates a translation adjustment which does not result in an

38、 inflow or outflow of cash. Transaction exposure, which results from the receipt or payment of foreign currency, generates foreign exchange gains and losses which are realized in cash. 3.Although balance sheet exposure does not result in cash inflows and outflows, it does nevertheless affect amounts

39、 reported in consolidated financial statements. If the foreign currency is the functional currency, translation adjustments will be reported in stockholders equity. If translation adjustments are negative and therefore reduce total stockholders equity, there is an adverse (inflationary) impact on th

40、e debt to equity ratio. Companies with restrictive debt covenants requiring them to stay below a maximum debt to equity ratio, may find it necessary to hedge their balance sheet exposure so as to avoid negative translation adjustments being reported. If the U.S. dollar is the functional currency or

41、an operation is located in a high inflation country, remeasurement gains and losses are reported in income. Companies might want to hedge their balance sheet exposure in this situation to avoid the adverse impact remeasurement losses can have on consolidated income and earnings per share. The parado

42、x in hedging balance sheet exposure is that, by agreeing to receive or deliver foreign currency in the future under a forward contract, a transaction exposure is created. This transaction exposure is speculative in nature, given that there is no underlying inflow or outflow of foreign currency that

43、can be used to satisfy the forward contract. By hedging balance sheet exposure, a company might incur a realized foreign exchange loss to avoid an unrealized negative translation adjustment or unrealized remeasurement loss. 4.The gains and losses arising from financial instruments used to hedge bala

44、nce sheet exposure are treated in a similar manner as the item the hedge is intended to cover. If the foreign currency is the functional currency, gains and losses on hedging instruments will be taken to accumulated other comprehensive income. If the U.S. dollar is the functional currency, gains and

45、 losses on the hedging instruments will be offset against the related remeasurement gains and losses. 5.The major concept underlying the temporal method is that the translation process should result in a set of translated U.S. dollar financial statements as if the foreign subsidiarys transactions ha

46、d actually been carried out using U.S. dollars. To achieve this objective, assets carried at historical cost and stockholders equity are translated at historical exchange rates; assets carried at current value and liabilities (carried at current value) are translated at the current exchange rate. Un

47、der this concept, the foreign subsidiarys monetary assets and liabilities are considered to be foreign currency cash, receivables, and payables of the parent which are exposed to transaction risk. For example, if the foreign currency appreciates, then the foreign currency receivables increase in U.S

48、. dollar value and a gain is recognized. Balance sheet exposure under the temporal method is analogous to the net transaction exposure which exists from having both receivables and payables in a particular foreign currency.The major concept underlying the current rate method is that the entire forei

49、gn investment is exposed to foreign exchange risk. Therefore all assets and liabilities are translated at the current exchange rate. Balance sheet exposure under this concept is equal to the net investment.6.The Retained Earnings balance is created by a multitude of transactions: all revenues, expen

50、ses, gains, losses, and dividends since the companys inception. Identifying each component of this account (so that a separate translation can be made) would be virtually impossible. Therefore, in the initial year that Statement 52 was applied, the ending balance calculated under Statement 8 was mer

51、ely brought forward. Thereafter, the ending balance translated each year for retained earnings becomes the beginning figure to be reported for the following year.7.The major differences relate to non-monetary assets carried at historical cost and related expenses, i.e., inventory and cost of goods s

52、old; property, plant, and equipment and depreciation expense; and intangible assets and amortization expense. Under the temporal method, these items are all translated at historical exchange rates. Under the current rate method, the assets are translated at the current exchange rate and the related

53、expenses are translated at the average exchange rate for the current period.8.The functional currency is the currency of the subsidiarys primary economic environment. It is usually identified as the currency in which the company generates and expends cash. FASB ASC 830 recommends that several factor

54、s such as the location of primary sales markets, sources of materials and labor, the source of financing, and the amount of intercompany transactions should be evaluated in identifying an entitys functional currency. FASB ASC 830 does not provide any guidance as to how these factors are to be weight

55、ed (equally or otherwise) when identifying an entitys functional currency.9.The foreign subsidiarys net asset position in foreign currency at the beginning of the period is first determined. Changes in net assets are determined to explain the net asset balance in foreign currency at the end of the p

56、eriod. The beginning net asset position and changes in net assets are translated at appropriate exchange rates and the ending net asset position in dollars is determined.The ending net asset balance in foreign currency is then translated at the current rate and this result is subtracted from the end

57、ing net asset position in dollars (already calculated). The difference is the translation adjustment. It is positive if the actual dollar net asset position is less than the net asset position based on the current exchange rate. The translation adjustment is negative if the actual dollar net asset p

58、osition is greater than if translated at the current rate.The cumulative translation adjustment is reported on the U.S. dollar Balance Sheet in the Stockholders Equity Section as a part of Accumulated Other Comprehensive Income.10.One theory mentioned by the FASB identifies the translation adjustmen

59、t as a measure of unrealized increases and decreases that have occurred in the value of the foreign subsidiary because of exchange rate changes. A second theory argues that this adjustment is no more than a mechanically derived number that must be included to keep the balance sheet in equilibrium al

60、though the figure has no intrinsic meaning. The FASB did not indicate that either theory is considered more appropriate. 11. Translation is required when a foreign currency is the functional currency. Remeasurement is required in two situations:a. The U.S. dollar is the functional currency.b. The fo