Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 14: Translation of
Financial Statements of
Foreign Affiliates
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
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Foreign Subsidiaries
A foreign subsidiary is consolidated if
the parent company owns a controlling
interest in the subsidiary
Exceptions:
 The
intent to control is temporary
 Control
does not rest with the parent
government restrictions on asset withdrawal
exchange restrictions
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Translating Financial Statements of
Foreign Affiliates
Translation: the conversion of financial
statements from one currency to
another
Financial
statements
in Franc
Translation
Financial
statements
in U.S. dollars
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Exchange Rates
Current exchange rate
= the spot rate on the balance sheet date
Historical exchange rate
= the spot rate on the
transaction date
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Functional Currency
Definition:
 Functional
currency of a foreign affiliate is
the currency of the economic environment in
which it primarily conducts its operations
can be:
 local
 the
a
currency of the affiliate
U. S. dollar
third currency
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Translation Methods
Current Rate Method
Temporal Method
 all assets and liabilities  monetary assets and
are translated using
liabilities - current
the current exchange
exchange rate
rate
 assets and liabilities
 revenues and
carried at historical cost
expenses - average
- historical exchange rate
exchange rate
 assets and liabilities
carried at current value current exchange rate
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Functional Currency Indicators
cash flows
sales prices
sales market
expenses
financing
intercompany transactions
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Determining Functional Currency
Accounts stated in local currency of foreign affiliate
Do economic indicators
show that functional
currency = U.S. $?
No
Foreign economy
highly inflationary?
Yes
Yes
Function currency
= U.S. $
Function currency
= U.S. $
Remeasurement
Remeasurement
No
Function currency
= local currency
Translation
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Remeasurement VS Translation
Remeasurement
 convert financial
statement elements
using temporal method
 translation adjustment
included in net income
Translation
 convert financial
statement elements
using current rate
method
 translation adjustment
recorded in
stockholders equity
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Translation Process
Local currency
Remeasurement
Not
necessary
Functional
currency
Local
currency
Translation
U.S. dollar
Current
rate method
Books kept in
local currency
Temporal
method
U.S.
dollar
Not
necessary
Temporal
method
A third
currency
Current
rate method
Financial statements
in U. S. dollars
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Translation (Current Rate Method)
Assets and liabilities
Current exchange rate
Paid-in capital:
purchase
acquisition
Historical rate on the
date of acquisition
Paid-in capital:
pooling
acquisition
Historical rate on the
date of capital
transaction of
subsidiary
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Translation (Current Rate Method)
Beginning R/E
= Ending balance of
last year
Dividends
Historical rate when
dividend is declared
Revenue and
Average exchange rate
expenses
Cumulative
translation adjustment
= Balance amount in
the balance sheet
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Translation (Current Rate Method)
Cumulative
translation
adjustment
= Balance amount in
the balance sheet
Current year
translation
adjustment
“Other comprehensive
income” in
shareholders equity
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Remeasurement (Temporal Method)
Monetary assets and
liabilities carried at
current values
Current exchange
rate
Nonmonetary assets
and liabilities carried
at current values
Current exchange
rate
Nonmonetary assets
and liabilities carried
at historical costs
Historical rate on
the date of
transaction
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Remeasurement (Temporal Method)
Paid-in capital:
purchase
acquisition
Historical rate on the
date of acquisition
Paid-in capital:
pooling
acquisition
Historical rate on the
date of capital
transaction of
subsidiary
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Remeasurement (Temporal Method)
Beginning R/E
= Ending balance of
last year
Dividends
Historical rate when
dividend is declared
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Remeasurement (Temporal Method)
Revenues and
expenses related to
assets and liabilities
translated at
historical rates
Historical rate used
for the related
asset or liability
accounts
(inventory cost and
depreciation)
Other revenues and
expenses
Average exchange
rate
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Remeasurement (Temporal Method)
Current year
translation
adjustment
Net income
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Financial Statement Disclosure
Aggregate translation gain/loss included
in net income
 disclosed
in (notes to) financial statement
Exchange rate changes that occur after
the balance sheet date and their effect on
unsettled foreign currency transactions, if
significant
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Financial Statement Disclosure
Analysis of the cumulative
translation adjustment
should be presented
 as
part of statement of
changes in equity or

in a separate statement
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Financial Statement Disclosure
Analysis of the cumulative translation
adjustment includes
 beginning
 current
and ending amounts
period’s aggregate adjustment
translation of foreign currency statements
gains/losses from hedging activities and
intercompany long-term investment transactions
 income
taxes allocated
 amount
transferred to net income
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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