TRANSLATION OF FOREIGN
CURRENCY FINANCIAL
STATEMENTS
When a U.S. company
prepares its financial
statements, it must include its
foreign-based operations:
a) measured in US dollars
b) reported using GAAP
The foreign operations may be:
a) subsidiaries
b) branches
c) other investments of the US
firm
OBJECTIVE OF
TRANSLATION PROCESS:
Provide information that shows
the expected impact of exchange
rate changes on the US company’s
cash flows and equity.
STEPS IN THE TRANSLATION
PROCESS:
Receive financial statements of foreign
subsidiary (reported in a foreign
currency).
Restate to conform to GAAP (on
worksheet).
Translate amount in each account into US
$.
Consolidate the translated accounts with
the parent’s accounts.
METHODS OF TRANSLATION
PERMITTED UNDER GAAP:
Current Rate Method
Temporal Method
Choice based on Functional
Currency of the foreign
operation.
FUNCTIONAL CURRENCY:
The currency of the environment
in which the entity primarily
generates and expends cash.
[In highly inflationary economies,
the Functional Currency must be
the US dollar].
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