C H A P T E R

1. C H A P T E R 10 Translation of Foreign Currency Financial Statements

2. Translation of Financial Statements Our subsidiaries in other countries are required by local regulations to use the local currency where they are located. Their statements must be translated to US $. If we control our subsidiaries, why don’t they all use the U.S. $ as their currency?

3. Translation of Financial Statements In addition, many countries have different accounting rulesthat we must consider before translating the sub’s financial statements.

4. Translation of Financial Statements • To translate a foreign subsidiary’s financial statements into U.S. $, we must use both: • Historical Exchange Rates, and • Current Exchange Rates.

5. Translation Adjustments • The use of different exchange rates during translation means the resulting financial statements will not balance! • To force the statements to balance, an account called “Translation Adjustment” is debited or credited.

6. Translation Methods • Current/Noncurrent Method • Since 1975, no longer allowed by GAAP. • Monetary/Nonmonetary Method • Developed in 1956. Not used extensively. • Current Rate Method • Temporal Method Methods in use today.

7. Parent Subsidiary TranslationCurrent Rate Method • Use current exchange rates to translate all assets and liabilities. • Use historical (or average exchange rates to translate equity accounts. • Use historical (or average exchange rates to translate income statement accounts.

8. Parent Subsidiary TranslationTemporal Method • Use historical exchange rates to translate assets and liabilities carried at historical cost. • Use current exchange rates to translate assets and liabilities carried at current cost or future value. • Use historical (or average) exchange rates to translate equity, revenue, and expense accounts.

9. Temporal Method - decompose COGS into its component parts and translate each part using the appropriate rate Apply Lower-of-Cost-or-Market using the foreign exchanges rates. Calculation of Cost of Goods Sold Current Rate Method - translate using the weighted average rate for the current period.

10. Fixed Assets and Accumulated Depreciation Current Rate Method - translate fixed assets and accumulated depreciation using the spot rate as of the balance sheet date. Temporal Method - fixed assets acquired at different times will be translated using their respective historical translation rates. Accumulated depreciation uses the same historical rates as the related asset.

11. Depreciation Expense Current Rate Method - translatedepreciation expense using the weighted-average rate for the current period Temporal Method - translate depreciation expense using the various historical rates related to the underlying assets.

12. Temporal Method - the gain must be computed indirectly, using different rates. Gain or Loss on the Sale of an Asset Current Rate Method - translate the gain/loss using the historical rate in effect on the date of sale

13. Disposition of Translation Adjustment • Current Method • Translation Adjustment is reported on the Balance Sheet. • Temporal Method • Adjustment is reported on the Income Statement as a Translation Gain or (Loss)

14. TranslationU.S. Accounting Rules • SFAS No. 8 (1975) - Accounting for Translation of Foreign Currency Transactions and Foreign Currency Financial Statements. • SFAS No. 52 (1981) - Foreign Currency Translation. • SFAS No. 130 (1998)

15. SFAS No. 8 • Mandated the temporal method. • Translations gains and losses reported on the income statement. • Assumes that subs will use the U.S $ for accounting if possible (the U.S. $ perspective to translation). A very negative reaction from the profession. Discouraged foreign direct investment in order to avoid translation losses on the income statement.

16. SFAS No. 52 Recognized two types of subs: • Subs that do most of their transactions in U.S. $ • Subs that operate relatively independently of their U.S. parents. Temporal method still applies. Applies the “local currency perspective”. Use current rate method. Translation adjustment appears in the equity section.

17. Translation - Example • News Co., is a wholly owned foreign sub of ATG Corporation. News Co.’s transactions and financial statements are denominated in the local (functional) currency, the Pater (PT). • Using the following information, translate their statements into US $.

18. Translation - Example • News Co.’s common stock was issued in 1992 when the exchange rate was $1.00 = 1.20 PT. • Fixed assets were acquired in 1993 when the exchange rate was $1.00 = 1.10 PT. • As of Jan. 1, 2001, the R/E balance was translated at $350,000. • Inventory was acquired evenly throughout the year.

19. Translation - Example • The Dec. 31, 20007 translation adjustment had a debit balance of $69,841. • Dividends were declared on March 15, 2001, and equipment was sold on October 1, 2001. • The following exchange rates were in effect during the year:

20. Translation - Example Determine the appropriate exchange rates to use for each account.

21. Translation - Example Weighted average rates are generally used for Sales, COGS, and other recurring expenses.

22. Translation - Example The actual historical rate is used when we can identify it efficiently.

23. Translation - Example

24. Translation - Example Determine the appropriate exchange rates to use for each account.

25. Translation - Example The beginning R/E is carried over from the prior year.

26. Translation - Example The net income is taken from the income statement.

27. Translation - Example Dividends are translated at the historical rate on the date of declaration.

28. Translation - Example

29. Translation - Example

30. Translation - Example All assets and liabilities are translated at the current rate at the balance sheet date.

31. Translation - Example Common Stock is translated at the historical rate at the time the stock was issued.

32. Translation - Example The Ending R/E comes from the statement of retained earnings.

33. Translation - Example The translation adjustment is: The difference between Net Assets at current rates and Net Assets at historical rates added to the translation adjustment balance at the beginning of the year: $41,511 + $69,841 = $111,352

34. Translation - Example

35. Remeasurement of Financial Statements • If the sub’s functional currency is the U.S. $, then any balances denominated in the local currency, must be remeasured. • Remeasurement requires the application of the temporal method. • The remeasurement gain/loss appears on the income statement.

36. Disclosures Related to Translation • An analysis of the change in the cumulative translation adjustment. • can be on the Statement of Retained Earnings or in the Notes • Many companies also include a description of the translation procedures in Note 1.

37. I just can’t take much more of this . . .