advanced accounting 6e by jeter chaney chapter 13

• The conversion from another currency into the currency of the parent company is frequently Current Exchange Rate Historical Exchange Rate Accounting for Operations in Foreign Countries

Learning Objectives

dollars

under current GAAP

2

Learning Objectives

highly inflationary economy

3

Translation of Financial Statements

the equity method of accounting applied

4

Accounting for Operations in Foreign Countries

5 Foreign statements that are not in conformity with U.S GAAP must be adjusted to conform to U.S standards before conversion into U.S dollars.

• The conversion from another currency into the currency of the parent company is frequently

Current Exchange Rate

Historical Exchange Rate

Accounting for Operations in Foreign Countries

Translating Statements of Foreign Affiliates

Translating Statements of Foreign Affiliates

Translation Adjustment or Translation Gain or Loss

using the historical exchange rate

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LO 1 Current versus historical exchange rates.

Not a Choice

Objectives of Translation

Functional Currency Concept

enterprise’s cash flows and equity

functional currencies in conformity with U.S GAAP

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LO 2 The objectives of translation.

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.

• Current rate method

– All assets and liabilities are translated at current exchange rate.

– Revenues and expenses are translated at the exchange rate on the date which each transaction

occurred

• An appropriate average rate can be used.

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Translation Methods

LO 4 Two methods of conversion.

•To accomplish the objectives of translation, two translation methods are used depending on the

functional currency of the foreign entity.

1. Current rate method

2. Temporal method

• 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.

• Translated at exchange rate on date transaction occurred.

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Translation Methods

LO 4 Two methods of conversion.

Identifying the Functional Currency

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LO 3 Identifying the functional currency.

The Functional Currency may be

1. The local currency of the foreign entity,

2. The U.S dollar, or

3. The currency of a third country.

Economic Indicators of Functional Currency :

Identifying the Functional Currency

Review Question

Indicators that the local currency is also the functional currency include all of the following except:

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LO 3 Identifying the functional currency.

Translation of Foreign Currency Financial Statements

• Remeasurement is the process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency

• Translation Accounts measured in the functional currency are translated into the reporting

currency using the current rate method

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LO 4 Which methods of conversion to use.

“Translation” may be used synonymously with the current method, “remeasurement” is used synonymously with the temporal method.

Translation of Foreign Currency Financial Statements

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LO 4 Which methods of conversion to use.

Accounts stated in local currency of foreign entity.

Is the foreign economy highly

inflationary?

Determine the functional currency (FC) per

economic indicators.

Translate to U.S dollars using current rate

method.

Remeasure to

FC using temporal method.

Remeasure to U.S dollars using

Functional currency (FC) is

U.S Dollar. Is the FC the U.S dollar? Is the FC the local currency?

Yes

Translation of Foreign Currency Financial Statements

Foreign Entity Operates in Highly Inflationary Economy

lost its utility as a store of value and cannot be a functional measuring unit

method

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LO 6 Foreign entity operating in a highly inflationary economy.

Translation of Foreign Currency Financial Statements

Foreign Entity Operates in Economy that is Not Highly Inflationary - Functional currency must

be identified Translation process:

stockholders’ equity

Translation gain or loss (temporal)is reported in income and adjustment (current rate)

is recorded as a separate component of stockholders’ equity

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Books kept in local currency

Local currency

A third currency

Temporal method Not necessary

Not necessary Current rate method Current rate method

U S dollars

• Current Rate Method

Assets and liabilities

Paid-in capital

Current year translation adjustment

• Translation

Historical rate

Equals ending balance of last year

Historical rate when dividend is declared

Balance amount in the balance sheet

equity)

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Translation – Current Rate Method

LO 7 The functional currency is the local currency.

Translation – Current Rate Method

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Consultants located in Zurich, Switzerland

Direct exchange rates for Swiss franc are:

Dollars per Franc

Required: Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of

translation.

LO 7 The functional currency is the local currency.

Translation – Current Rate Method

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Translation – Current Rate Method

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Exercise 13-4: Prepare a schedule to verify the translation adjustment.

Adjustment for changes in net asset position:

LO 7 The functional currency is the local currency.

Translation – Current Rate Method

• Temporal Method

– Monetary assets and liabilities (cash, a/r, a/p)

– Assets and liabilities carried at historical cost

– Assets and liabilities carried at current values.

– Revenues and expenses related to assets and

liabilities translated at historical rates.

• Translation

– Current exchange rate

– Historical exchange rates

– Historical exchange rates.

– Exchange rate on date transaction occurred.

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Translation – Temporal Method

LO 8 The functional currency is the U.S dollar.

Translation – Temporal Method

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Consultants located in Zurich, Switzerland

Direct exchange rates for Swiss franc are:

Dollars per Franc

Required: Convert (remeasure) the financial statements of the foreign subsidiary using the temporal method of translation.

LO 7 The functional currency is the local currency.

Translation – Temporal Method

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Exercise 13-5: Prepare a schedule to verify the translation gain or loss.

changes in net monetary position:

Less: Decrease in net asset position:

LO 7 The functional currency is the local currency.

Translation – Temporal Method

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Financial Statement Disclosure

period

a separate statement or note or as part of a statement of changes in equity

foreign currency transactions, if significant

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LO 10 Required disclosure.