Foreign Currency Accounting - Translation of Financial Statements of Foreign Subsidiaries / Associates

Basic rules:
 Assets and liabilities are translated using the closing rate.
 Income and expenses (i.e. net income or loss) are translated using the average rate.
 Equity or net assets (i.e. issuance of shares, dividends declared) are translated using the historical or
transaction rate.

Total assets at closing rate (Assets in FCU x closing rate) xxx

Total liabilities at closing rate (Liabilities in FCU x closing rate) (xxx)
Net assets at closing rate (a) xxx

Net assets, beginning at historical rate (Equity in FCU x historical rate) xxx
Net income (loss) for the year at average rate (Net income in FCU x average rate) xxx/(xxx)
Issuance of new capital at transaction rate (Issuance in FCU x transaction rate) xxx
Dividends issued at transaction rate (Dividends in FCU x transaction rate) (xxx)
Net assets, ending xxx
Net assets, at closing rate (a) (xxx)
Translation adjustment – OCI gain or loss (balancing figure or squeeze) xxx

Sample problem:

On January 1, 2010 XYZ Corporation organized Avenue Company as a wholly-owned subsidiary in Hongkong with an
initial investment cost of HK$90,000. Avenue’s December 31, 2010, trial balance in HK$ is as follows:

Debit Credit
Cash HK$ 10,500
Accounts receivable (net) 30,000
Receivable from XYZ 7,500
Inventory 37,500
Plant and equipment 150,000
Accumulated depreciation HK$ 15,000
Accounts payable 18,000
Bonds payable 75,000
Common stock 90,000
Sales 225,000
Cost of goods sold 105,000
Depreciation expense 15,000
Operating expense 45,000
Dividends paid 22,500
Total HK$ 423.000 HKS423.000
Additional information:
1. Purchases of inventory goods are made evenly during the year. Items in the ending inventory were purchased
November 1.
2. Equipment is depreciated by the straight-line method with a 10-year life and no residual value. A full year’s
depreciation is taken in the year of acquisition. The equipment was acquired on March 1.
3. The dividends were declared and paid on November 1.
4. Exchanges rates were as follows:
January 1 HK$1 = P3.30
March 1 HK$1 = 3.40
November 1 HK$1 = 3.70
December 31 HK$1 = 3.00
2010 Average HK$1 = 3.50

Full and Partial ownership (with hedging):

ABC Corporation has an equity investment in a Company in Singapore, NS Company. On December 31, 2009, the
balance in ABC’s Investment in NS account is P945,000, equal to 30% of NS’s net assets of 75,000 Singapore Dollars
times a P42 year-end exchange rate. On this date, ABC has no adjustment balance relative to its investment in NS.
Assume that on November 2, 2.010, NS declares and pays a 3,750 Singapore Dollars dividend, when the spot rate is
P43.50. On December 31, 2010, P reports net income of 15,000 Singapore dollars. The weighted average exchange
rate for the year 2010 is P43, and the closing exchange rate on December 31, 2010 is P44. As a result of the hedging,
how much is the translation adjustment that will appear in the stockholders’ equity section of the balance sheet of ABC
Corporation on December 31, 2010, assuming ABC Corporation owns:

a. 100% of the Singaporean Company

b. 30% of the Singaporean Company
c. 30% of the Singaporean Company, but to hedge its net investment in NS, ABC borrows 18,750 Singapore Dollars
for one year at 12% interest on January 1, 2010 at a spot rate of P42. The loan is denominated in Singapore
Dollars, with principal and interest payable on January 1, 2011.