外幣報表折算方法比較Typesofforeigncurrencytranslationmethods

1、 of Foreign Currency Translation Methods As we know, there is no international uniform customs in executing the foreign currency financial statement translation method up to now and the different translation methods have their own advantages and disadvantages. So today lets make a deep study on the

2、foreign translation methods and their application .l to have a better knowledge of foreign currency translation methods.l exploring a concrete applying method that meets China s national situations.What I will talk about ?Part OneCurrent-noncurrent MethodBalance Sheet:Current assets and liabilities

3、: current rateNoncurrent assets and liabilities : historical rateIncome Statement:Revenues and expenses (excluding depreciation and amortization) : average rates.Depreciation and amortization: charges at historical rates in effect when related assets are acquired.The key of this method is to make a

4、distinction between current and noncurrent items. Current-noncurrent MethodLimitations: 1.the dealing of Inventories : be equally exposed to exchange risk 2.the dealing of L-T items : shifts the impact of fluctuating currencies to the year of settlement. 3. Current and noncurrent definitions are mer

5、ely a classification scheme, not a conceptual justification of which rates to use in translation. Advantages: widely used in the analysis of working capital. United States: In the 1930s: be widely used until the 1970s: be replaced by temporal method. But there are still some countries use this metho

6、d.Monetary-Nonmonetary Method Balance Sheet:Monetary assets and liabilities: current rateNonmonetary assets and liabilities: historical rateIncome Statement: Revenues and expenses (excluding depreciation and amortization) : average rate Depreciation and amortization: charges at historical rates in e

7、ffect when related assets are acquired.The key of this method is to make a distinction between monetary and nonmonetary items.Advantages :1. It reflects changes in the domestic currency equivalent of long-term debt in the period in which exchange rates change, producing a more timely indicator of ex

8、change rate effects.2. Inventories translated at historical rate overcomes the shortcomings of the current-noncurrent method to a certain degree. Limitations:1. Relying on a classification scheme to determine appropriate translation rates. This may lead to inappropriate results.2. It distorts profit

9、 margins by matching sales at current prices and translation rates against cost of sales measured at historical costs and translation rates.Monetary-Nonmonetary Method l Monetary assets and liabilities: translated at the current rate.l Nonmonetary items :translated at rates that preserve their origi

10、nal measurement bases.nForeign currency balances at historical cost are translated at historical rates.nForeign currency balances at current cost or market value are translated at the current ratel Revenues and expenses, including cost of sales if inventories are carried at market, at average rates.

11、l Depreciation, amortization charges, and cost of sales when inventories are carried at cost, at historical rates in effect when related assets are acquired. Temporal MethodAdvantages :1. Flexible , reasonable, scientific2. It is consistent with the preparation of consolidated accounting statements

12、of the parent company theory.Limitations:1. During the period of the exchange rate volatility, translation gains( loss) are always reckoned to current profit and loss. distorting the profit margins.2. Irregularity of financial results and financial relations changes the subsidiarys financial ratio.T

13、emporal MethodCurrent (Single) Rate Methodlall foreign currency assets and liabilities : translated at current ratelall revenues and expenses : translated by an appropriately weighted average of current exchange rates for the period.Advantages :1. Its very easy to operate and understand.2. This appr

14、oach often used when the accounts of an independent company are translated for the convenience of foreign stockholders or other external user groups.3. It can effectively deal with overseas fixed assets financed by foreign borrowing and exchange rate changes have made gain and loss offset each other

15、.Limitations:1.The assumption that all local currency assets are exposed to exchange risk seldom accords with economic reality as inventory and fixed asset values are generally supported by local inflation.2. using multiple currency perspectives violates the basic purpose of consolidated financial s

16、tatements.Current (Single) Rate Method3. Translating all foreign currency balances by the current rate creates translation gains and losses every time exchange rates change. Reflecting such exchange adjustments in current income could significantly distort reported measures of performance.Example :

17、Financial Statement EffectsPart TwoAssetsLiabilities and Owners Equitycash160Accounts payable80Accounts receivable320S-T borrowings160Inventories240L-T debt160Fixed assets-net value 480Common stock180Retained earnings620Total1200Total1200A Companys Balance Sheet 20XX. 12.31 Million dollars Before U.

18、S dollars Devaluation After U.S dollars Devaluation $1= ￥8.2 RMB （historical-rate） $1=￥7.2 RMB (current-rate)Financial Statement EffectsItemsCNMMNMTMCMAssetsCashA/RInventories(present price $220)F/A (net)TotalLiabilities andOwners EquityA/PS-T BorrowingsL-T DebtCommon StockRetained earningsCumulativ

19、e Translation AdjustmentTotal$160 ￥1152 320 2304 240 1728 480 3936$1200 ￥9120$ 80 ￥576 160 1152 160 1312 180 1476 620 4604$1200 ￥9120￥1152 2304 1968 3936 ￥9360￥576 1152 1152 1476 5004 ￥9360￥1152 23041968/1584 3936￥9360/8976￥576 1152 1152 14765004/4620￥9360/8976￥1152 2304 1728 3456 ￥8640￥576 1152 115

20、2 1476 5084 -800￥86401. Under the current rate method, exchange rate changes affect the dollar equivalents of the companys total foreign currency assets and liabilities in the current period.2. Accounting exposure under the temporal method depends on whether the companys inventories or other nonmone

21、tary assets are valued at historical cost (and therefore not exposed) or some other valuation basis.3. the different translation methods in this example give a wide array of accounting results.Which is Best?Part ThreeWhich is best? In the accounting practice, in order to adapt to the specific econom

22、ic environment and theories of management , that four methods are used widely in the world ,but they each have advantages and disadvantages. There is not a single translation method which is appropriate for all circumstances in which translations occur and for all purposes that translation serve. 1.

23、 The circumstances underlying foreign exchange translations differ widely. 2. Translations are made for different purpose.We therefore pose three questions:1.Is it reasonable to use more than one translation method?2.If so, what should be the acceptable methods and under what conditions should they

24、be applied?3.Are there situations in which translations should not be done at all?Which is best?l It is clear that a single translation method cannot equally serve translations occurring under different conditions and for different purposes. More than one translation method is needed.l We think that

25、 three different translation approaches can be accepted: (1) the historical method, (2) the current method, and (3) no translation at all. Which is best?l The temporal translation method is easily adapted to processes that make accounting adjustments during the translation. The temporal principle ca

26、n accommodate any asset valuation framework, be it historical cost, current replacement price, or net realizable values.l The current rate method is appropriate when the translated accounts of foreign subsidiaries keep the local currency as the unit of measure; that is, when foreign entities are vie

27、wed from a local (as opposed to a parent) company perspective. A second use of the current rate method happens when price-level-adjusted accounts are to be translated to another currency. l No translation is appropriate between highly unstable and highly stable currencies. No translation is necessary when financial statements of independent co