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Advanced Accounting Jeter Chapter 13
Advanced Accounting Jeter Chapter 13
Accounting
Jeter Chaney
Translation of
Financial
Statements of Foreign
Affiliates
1
Learning Objectives
Distinguish between the current exchange rate and the
historical exchange rate.
Understand the objectives of financial statement
translation.
Identify the functional currency of a foreign entity.
Compare the two methods used to convert the financial
statements of a foreign entity into U.S. dollars.
Distinguish between the circumstances under which each
of the two methods is appropriate under current GAAP.
2
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Learning Objectives
Explain the factors involved in translating the statements of
a foreign entity operating in a highly inflationary economy.
Translate the statements of a foreign entity when the
functional currency is the local currency.
Translate the statements of a foreign entity when the
functional currency is the U.S. dollar.
Understand the concept of comprehensive income in the
context of foreign currency translation.
Identify the disclosure requirements for firms with foreign
entities.
3
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Translation of Financial
Statements
A U.S. company may be involved in foreign activities
through the operations of a:
branch,
subsidiary, or
investee company.
If the foreign entity maintains its books in a foreign
currency,
Its accounts must be restated into U.S. dollars before
they are combined or consolidated or the equity method
of accounting applied.
4
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
5
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Translating
Statements
of
Foreign
Accounting for Operations in Foreign
Affiliates
Countries
The conversion from another currency into the currency
of the parent company is frequently called translation.
Translation Process
Financial
Statements in
Euros
Current Exchange
Rate
Historical Exchange
Rate
Financial
Statements in
U.S. Dollars
6
LO 1 Current versus historical exchange rates.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Objectives of Translation
Functional Currency Concept
Objectives of translation FASB ASC section 830-30:
Provide information regarding the exposed economic
effects of an exchange rate change on an enterprises
cash flows and equity.
Reflect in consolidated statements the financial results
and relationships measured in their functional
currencies in conformity with U.S. GAAP.
The Board believes that the operating performance and financial condition of a foreign entity
are best measured by expressing its accounts in the currency of the economic environment in
which it primarily conducts its operations and generates and expends its cash, its functional
currency.
8
LO 2 The objectives of translation.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Translation Methods
To accomplish
Translation Methods
Temporal Method
Monetary assets and liabilities (cash, a/r, a/p).
Translated at current exchange rate.
Assets and liabilities carried at historical cost.
Translated at historical exchange rates.
Assets and liabilities carried at current values.
Translated at current exchange rate.
Revenues and expenses related to assets and liabilities
translated at historical rates.
Translated at historical exchange rates.
Other revenues and expenses
Translated at exchange rate on date transaction occurred.
10
LO 4 Two methods of conversion.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Cash flow
Expenses
Sales prices
Financing
Sales market
Intercompany transactions
11
LO 3 Identifying the functional currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
12
LO 3 Identifying the functional currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
No
Yes
Functional
currency (FC) is
U.S. Dollar.
Is the FC the
U.S. dollar?
Yes
Remeasure to U.S.
dollars using
temporal method.
No
No
Remeasure to
FC using temporal
method.
Yes
Translate to
U.S. dollars using
current rate method.
15
LO 6 Foreign entity operating in a highly inflationary economy.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
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
U. S. dollars
17
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Translation
Current exchange rate
Historical rate
Equals ending balance of last
year
Historical rate when dividend
is declared
Average exchange rate
Balance amount in the
balance sheet
Other comprehensive income
(shareholders equity)
18
LO 7 The functional currency is the local currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Required: Translate the year-end balance sheet and income statement of the
foreign subsidiary using the current rate method of translation.
19
LO 7 The functional currency is the local currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
20
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Rate
30,000
$.5987
17,961
45,000
.5654
25,443
(15,000)
.5810
--60,000
(8,715)
34,689
.5321
31,926
(2,763)
21
LO 7 The functional currency is the local currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
22
LO 7 The functional currency is the local currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
Translation
Current exchange rate.
Historical exchange rates.
Current exchange rate.
Historical exchange rates.
Exchange rate on date
transaction occurred.
23
LO 8 The functional currency is the U.S. dollar.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
25
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
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)
26
LO 7 The functional currency is the local currency.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.
27
LO 10 Required disclosure.
Copyright 2015. John Wiley & Sons, Inc. All rights reserved.