國際會計第七版英文版課后答案(第六章)

Chapter6

ForeignCurrencyTranslation

DiscussionQuestionsSolutions

1.Foreigncurrencytranslationistheprocessofrestatingaforeignaccountbalancefromone

currencytoanother.Foreigncurrencyconversionistheprocessofphysicallyexchangingonecurrencyforanother.

2.Intheforeignexchangespotmarket,currenciesboughtandsoldmustbedeliveredimmediately,normallywithin2businessdays.ThusaSingaporeantouristbuyingU.S.dollarsattheairport

beforeboardingaplaneforNewYorkwouldhandoverSingaporedollarsandimmediately

receivetheequivalentamountinU.S.dollars.Theforwardmarkethandlesagreementsto

exchangeafixedamountofonecurrencyforanotheronanagreeddateinthefuture.For

example,aFrenchmanufacturerexportinggoodsinvoicedineurostoaJapaneseimporteron60-daycredittermswouldbuyaforwardcontracttosellyenforeuros2monthsinthefuture.

Transactionsintheswapmarketinvolvethesimultaneouspurchase(orsale)ofonecurrencyinthespotmarketandthesale(orpurchase)ofthesamecurrencyintheforwardmarket.Thus,a

Canadianinvestorwishingtotakeadvantageofhigherinterestrateson6-monthTreasurybillsintheUnitedStateswouldbuyU.S.dollarswithCanadiandollarsinthespotmarketandinvestintheUnitedStates.ToguardagainstafallinthevalueoftheU.S.dollarbeforematurity(when

theU.S.dollarproceedsareconvertedbacktoCanadiandollars),theCanadianinvestorwould

simultaneouslyenterintoaforwardcontracttosellU.S.dollarsforCanadiandollars6monthsinthefutureattodaysforwardexchangerate.

3.Thequestionreferstoalternativeexchangeratesthatareusedtotranslateforeignfinancial

statements.Thecurrentrateistheexchangerateatthefinancialstatementdate.Itis

sometimescalledtheyear-endorclosingrate.Thehistoricalrateistheexchangerateatthetimeoftheunderlyingtransaction.Theaveragerateistheaverageofvariousexchangeratesduringafiscalperiod.Sincetheaverageratenormallyisusedtotranslateincomestatementitems,itis

oftenweightedtoreflectanyseasonalchangesinthevolumeoftransactionsduringtheperiod.

Translationgainsandlossesdonotoccurifexchangeratesdonotchange.However,ifexchangerateschange,theuseofcurrentandaverageratescausestranslationgainsandlosses.Thesedonotoccurwhenthehistoricalrateisusedbecausethesame(constant)rateisusedeachperiod.

4.Inthisexample,theMexicanAffiliatesCanadiandollarloanisdenominatedinCanadiandollars.However,becausetheMexicanaffiliate’sfunctionalcurrencyisU.S.dollars,thepesoequivalentoftheCanadiandollarborrowingwouldberemeasuredinU.S.dollarspriortoconsolidation.IftheMexicanaffiliate’sfunctionalcurrencywerethepeso,theCanadiandollarloanwouldbe

remeasuredinpesosbeforebeingtranslatedtoU.S.dollars.

5.Atransactiongainorlossoccurswhenaforeigncurrencytransaction,e.g.,aforeigncurrency

borrowing,issettledatadifferentexchangeratethanthatwhichprevailedwhenthetransactionwasoriginallyincurred.Inthiscasethereisanexchangeofonecurrencyforanother.A

translationgainorloss,ontheotherhand,issimplytheresultofarestatementprocess.Thereis

nophysicalexchangeofcurrenciesinvolved.

6.Itisnotpossibletocombine,add,orsubtractaccountingmeasurementsexpressedindifferent

currencies;thus,itisnecessarytotranslatethoseaccountsthataremeasuredordenominatedinaforeigncurrencyintoasinglereportingcurrency.Foreigncurrencytranslationcaninvolve

restatementorremeasurement.Inrestatement,thelocal(functional)currencyiskeptastheunitofmeasure;thatis,thetranslationprocessmultipliesthefinancialresultsandrelationshipsinthelocalcurrencyaccountsbyaconstant,thecurrentrate.Incontrast,remeasurementtranslates

localcurrencyresultsasiftheunderlyingtransactionshadtakenplaceinthereporting

(functional)currencyoftheparentcompany;forexample,itchangestheunitofmeasureofaforeignsubsidiaryfromitslocal(foreign)currencytotheU.S.dollar.

7.Majoradvantagesandlimitationsofeachofthemajortranslationmethodsfollow.

CurrentRateMethod

Advantages:

a.Retainstheinitialrelationshipsintheforeigncurrencystatements.

b.Simpletoapply.

Limitations:

a.Violatesthebasicpurposeofconsolidation,whichistopresenttheresultsofaparentanditssubsidiariesasiftheywereasingleentity.

b.Inconsistentwithhistoricalcost.

c.Presumesthatalllocalassetsandliabilitiesaresubjecttoexchangerisk.

d.WhilestockholdersequityadjustmentsshieldanMNCsbottomlinefromtranslationgainsandlosses,suchadjustmentscoulddistortcertainfinancialratiosandbeconfusing.

Current-noncurrentMethod

Advantages:

a.Distortionsintranslatedgrossmarginsarereducedasinventoriesandtranslatedatthecurrentrate.b.Reportedearningsareshieldedfromthedistortingeffectsofcurrencyfluctuationsasexcess

translationgainsaredeferredandusedtooffsetfuturetranslationlosses.

Limitations:

a.Usesbalancesheetclassificationasbasisfortranslation.

b.Assumesallcurrentassetsareexposedtoexchangeriskregardlessoftheirform.

c.Assumeslong-termdebtisshelteredfromexchangeraterisk.

Monetary-nonmonetaryMethod

Advantages:

a.Reflectschangesindomesticcurrencyequivalentoflong-termdebtonatimelybasis.

Limitations:

a.Assumesthatonlymonetaryassetsandliabilitiesaresubjecttoexchangeraterisk.

b.Exchangeratechangesdistortprofitmarginsassalestransactedatcurrentpricesarematchedagainstcostofsalesmeasuredathistoricalprices.

c.Usesbalancesheetclassificationasbasisfortranslation.

d.Nonmonetaryitemsstatedatcurrentmarketvaluesaretranslatedathistoricalrates.

TemporalMethod

Advantages:

a.Theoreticallyvalid:compatiblewithanyaccountingmeasurementmethod.

b.Hastheeffectoftranslatingforeignsubsidiariesoperationsasiftheywereoriginallytransactedinthehomecurrency,whichisdesirableforforeignoperationsthatareextensionsoftheparent’sactivities.

Limitation:

a.Acompanyincreasesitsearningsvolatilitybyrecognizingtranslationgainsandlossescurrently.

Inarguingforonetranslationmethodoveranother,yourstudentsshouldeventuallyrealizethat,inthepresentstateoftheart,thereisprobablynoonetranslationmethodthatisappropriateforall

circumstancesinwhichtranslationsoccurandforallpurposesthat

translationserves.Itisprobablymorefruitfultohavestudentsidentifycircumstancesinwhichtheythinkonetranslationmethodismoreappropriatethananother.

8.Thecurrentratemethodisappropriatewhentheforeignentitybeingconsolidatedislargely

independentoftheparentcompany.Conditionswhichwouldjustifythismethodologyiswhentheforeignaffiliatetendstogenerateandexpendcashflowsinthelocalcurrency,sellsaproductlocallysothatitssellingpriceislargelyinsulatedfromexchangeratechanges,incursexpenseslocally,financesitsselflocallyanddoesnothaveverymanytransactionswiththeparent

company.Incontrast,thetemporalmethodseemsappropriateinthoseinstanceswhenthe

foreignaffiliate’soperationsareintegrallyrelatedtotheparentcompany.Conditionswhich

wouldjustifyuseofthetemporalmethodarewhentheforeignaffiliatetransactsbusinessintheparentcurrencyandremitssuchcashflowstotheparentcompany,sellsaproductlargelyintheparentcountryandwhosesellingpriceissensitivetoexchangeratechanges,sourcesitsfactorinputsfromtheparentcompany,receivesmostofitsfinancingfromtheparentandhasalargetwowayflowoftransactionswithit.

9.ThehistoryofforeigncurrencytranslationintheUnitedStatessuggeststhatthedevelopmentofaccountingprinciplesdoesnotdependontheoreticalconsiderationssomuchasonpolitical,

institutional,andeconomicinfluencesthataffectaccountingstandardsetting.Itmaybemore

realistictorecognizethattheoreticallysoundsolutionsareimpossibleaslongaspolicy

prescriptionsareevaluatedonpracticalgrounds.Withoutspecificchoicecriteriaderivedfrom

investordecisionmodels,itisfruitlesstoarguetheconceptualmeritsofcompetingaccountingtreatments.Itisfarmoreproductivetoadmitthatforeigncurrencytranslationchoicesaresimplyarbitrary.

Readersofconsolidatedfinancialstatementsshouldknowthattheforeigncurrencytranslationmethodusedisoneofseveralalternatives,andthisshouldbedisclosed.Thisapproachismoreopenandreducesthechancethatreaderswilldrawmisleadinginferences.

10.Foreigninflation,inparticular,thedifferentialrateofinflationbetweenthecountryinwhichasubsidiaryislocatedandthecountryofitsparentdeterminesforeignexchangerates.Theserates,inturn,areusedtotranslateforeigncurrencybalancestoparentcurrency.

11.IntheUnitedKingdom,financialstatementsofaffiliatesdomiciledinhyperinflationary

environmentsmustfirstbeadjustedtocurrentpricelevelsandthentranslatedusingthecurrent

rate;intheUnitedStates,thetemporalmethodwouldbeemployed.Thesecondpartofthis

questionisdesignedtogetstudentsfromabroadtofindoutwhatcompaniesintheirhome

countriesaredoingandtherebybeinapositiontosharetheirnewfoundknowledgewiththeir

classmates.Theyneedsimplygetontheinternetandreadthefootnotesofamajormultinationalcompanyintheirhomecountry.

12.UnderFASNo.52,theparentcurrencyisdesignatedasthefunctionalcurrencyforanaffiliate,whoseoperationsareconsideredtobeanintegralpartoftheparentcompany’soperations.

Accordingly,anythingthataffectsconsolidatedearnings,includingforeigncurrencytranslationgainsandlosses,isrelevanttoparentcompanyshareholdersandisincludedinreportedearnings.Incontrast,whenaforeignaffiliatesoperationsareindependentoftheparents,thelocal

currencyisdesignatedasitsfunctionalcurrency.Sincethefocusisontheaffiliateslocal

performance,translationgainsandlossesthatarisesolelyfromconsolidationareirrelevantand,therefore,arenotincludedinconsolidatedincome.

ExercisesSolutions

1.￥250,000,000X.008557=$2,139,250.

￥250,000,000￥116.86=$2,139,312

Thedifferenceisduetorounding.

2.Since￡1=US$1.9590and1=US$1.3256,￡1=US$1.9590/US$1.3256=1.4778.

Alternatively,1=US$1.3256/US$1.9590=￡.6767.

3.SingleTransactionPerspective:

4/1Purchases(￥32,500,000/￥116.91)$277,992

Cash$27,800

A/P(￥32,500,000-￥3,250,000)/￥116.91250,192

(Creditpurchase)

7/1Purchases[(￥29,250,000/￥116.91)–(￥29,250,000/￥115.47)A/P

(Torecordincreaseinpurchasesduetoyenappreciation)

7/1Interestexpense(￥29,250,000X.08X3/12)/￥115.47A/P(￥29,250,000/￥115.47)

Cash

(Torecordsettlement)

3,120

3,120

5,066

253,312

258,378

TwoTransactionsPerspective:

4/1Purchases

Cash

A/P

7/1Transactionloss

A/P

7/1Interestexpense

A/P

Cash

$277,992

$27,800

250,192

3,120

3,120

5,066

253,312

258,378

4.a.MXN1,750,000/MXN10.3=C$169,903.

b.TheCanadiandollarequivalentoftheMexicaninventoryaccountwouldnotchangeifthefunctionalcurrencywastheCanadiandollarasthetemporalmethodtranslatesinventory,anonmonetaryasset,attheexchangeratethatpreservesitsoriginalmeasurementbasis.Sinceinventoryisbeingcarriedatitsnetrealizablevalue,itwouldbe

translatedatthecurrentrate.HadinventorybeencarriedathistoricalcosuldhavebeentranslatedatthehistoricalrateorMXN3,750,000/MXN9.3=C$403,226.

5.Bahtisthefunctionalcurrency:

B2,500,000/20years=B125,000

B125,000/B37=3,378

B5,000,000/20years=B250,000

B250,000/B37=6,757

U.S.dollaristhefunctionalcurrency:

B2,500,000/20years=B125,000

B125,000/B40=3,125

B5,000,000/20years=B250,000

B250,000/B38=6,579

Totaldepreciation$9,704

6.IftheeuroistheGermansubsidiary’sfunctionalcurrency,itsaccountswouldbetranslatedintoAustraliandollarsusingthecurrentratemethod.InthiscasethetranslationgainofAUD4,545,455wouldappearinconsolidatedequity.

Thustheonlyitemaffectingcurrentincomewouldbethetransactionloss(lossonanunsettledtransaction)ofAUD1,514,515ontheeuroborrowing.

IftheAustraliandollarisdeemedtobethefunctionalcurrency,thenthetransactionlossand

translationgainwouldbothappearinreportedearningsasfollows:

AUD(1,514,515)transactionloss

AUD4,545,455translationgain

AUD3,030,940netforeignexchangegain

7.

U.S.Dollar

BeforeCNY

Appreciation

U.S.Dollar

AfterCNY

Appreciation

U.S.DollarAfterCNYDepreciation

CNYBalanceSheet

($.12=CNY1)

($.15=CNY1)

($0.09=CNY1)

AssetsAmountCurrentMonetaryCurrentMonetary

NoncurrentNonmonetaryNoncurrentNonmonetary

CashNT5,000$600$750$750$450$450

Accts.Receivable14,0001,6802,1002,1001,2601,260

Inventories

(cost=24,000)22,0002,6403,3002,6401,9802,640

Fixedassets,net39,0004,6804,6804,6804,6804,680

TotalCNY80,000$9,600$10,830$10,170$8,370$9,030

Liabilities&OwnersEquity

Accts.PayableCNY21,000Long-termdebt27,000

$

$2,520

3,240

3,150

3,240

$3,150

4,050

$1,890

3,240

$1,890

2,430

Stockholdersequity32,0003,8404,4402,9703,2404,710

TotalCNY80,000$9,600$10,830$10,170$8,370$9,030

AccountingexposureCNY20,000(29,000)20,000(29,000)

Translationgain(loss)US$600(870)(600)870

8.

U.S.Dollar

BeforeCNY

Appreciation

U.S.Dollar

AfterCNY

Appreciation

U.S.DollarAfterCNYDepreciation

CNYBalanceSheet

($.12=CNY1)

($.15=CNY1)

($.09=CNY1)

Assets

Cash

Accts.ReceivableInventories

(cost=24,000)

Fixedassets,netTotal

CNY5,00014,000

22,000

39,000

Amount$6001,680

2,640

3,600

CNY80,000$8,520

Temporal

$750

2,100

3,300

3,600

$9,750

Current

$750

2,100

3,300

5,850

$12,000

Temporal$450

1,260

1,980

3,600

$11,700

Current

$450

1,260

1,980

3,510

$7,200

Liabilities&OwnersEquity

Accts.PayableCNY21,000$2,520$3,150$3,150$1,890$1,890

Long-termdebt27,0003,2404,0504,0502,4302,430

Stockholdersequity32,0002,7602,5504,8007,3802,880

TotalNT$80,000$8,520$9,750$12,000$11,700$7,200

AccountingexposureNT$(7,000)32,000(7,000)32,000

Translationgain(loss)US$(210)960210(960)

c.Studentswillquicklydiscoverthateachtranslationmethodhasitsadvantagesanddisadvantages.

Aftersomediscussion,thequestionoftranslationobjectiveswillarise.Currencytranslationobjectivesarebasedonhowforeignoperationsareviewed.Ifforeignoperationsareconsideredextensionsoftheparent,acasecanbemadeforahistoricalratemethod:current-noncurrent,monetary-nonmonetary,ortemporal.Ifforeignoperationsareviewedfromalocalcompanyperspective,acasecanbemadeforthecurrentratemethod.Giventhecomplexityofmultinationalbusinessactivities,onecouldarguethata

singletranslationmethodwillnotserveallpurposesforwhichtranslationsaredone.Aslongasthe

objectivesofforeigncurrencytranslationdifferamongspecificreportingentities,apracticalsolutionistoinsistonfulldisclosureofthetranslationproceduresusedsothatusershaveabasisforreconcilinganydifferencesthatexist.

9.

CompanyA(CountryA)

(ReportingCurrency=Apeso)

BeginningofYearEndofYear

Assets:ExchangeRateTranslatedExchangeRateTranslatedApeso100Apeso100Apeso100

Bol100Apeso1=Bol1.25Apeso80Apeso1=Bol2Apeso50

Apeso180Apeso150

Translationloss=A$30

CompanyB(CountryB)

(ReportingCurrency=Bol)

BeginningofYearEndofYear

Assets:ExchangeRateTranslatedExchangeRateTranslated

Apeso100Apeso1=Bol1.25Bol125Apeso1=Bol2Bol200

Bol100Bol100Bol100

Bol225Bol300

Translationgain=Bol75

b.Thisexercisedemonstratestheeffectofthereportingcurrencyonforeigncurrencytranslationresultswhenthecurrentratemethodisused.Bothcompaniesareinseeminglyidenticalsituations,yetone

reportsatranslationlosswhiletheotherreportsatranslationgain.Onecompanyreportsshrinkingassetswhiletheotherreportsincreasingassets.Nothinghasactuallyhappenedbutanexchangeratechange.

Also,despiteastrongerApeso,CompanyAreportsaloss.Conversely,theBolweakened,yetCompanyBreportsagain.Itappearsthatastrengtheningcurrencyisnotalwaysgoodnews,norisaweakening

currencyalwaysbadnews.

Iftheintentionistorepatriatethefundsinvestedintheforeigncountry(CountryBfromCompanyA’sperspective,CountryAfromCompanyB’sperspective),thescenariomakessense.Afterall,CompanyAwillberepatriatingfewerApesosthanoriginallyinvestedandCompanyBwillberepatriatingmoreBol’sthanoriginallyinvested.Fluctuatingexchangerateshavechangedeachcompanyscommandoveraforeigncurrency.Assumingthecompanyintendstorepatriatethecurrency,itmakessenseto

includetherespectivegainorlossinincomeforthecurrentyear.Ontheotherhanditcanbearguedthatthegainorlossshouldbeexcludedfromincomeifthecompanyintendstokeeptheforeignassetsinvestedpermanently.

.

10.

TranslationRate

Cash

Marketablesecurities(cost)

Accountsreceivable

Inventory(market)

Equipment

Accumulateddepreciation

Prepaidexpenses

Goodwill

Accountspayable

Duetoparent(denominatedindollars)

Bondspayable

Incometaxespayable

Deferredincometaxes

Commonstock

Premiumoncommonstock

RetainedEarnings

Sales

Purchases

LocalCurrencyisDollaris

FunctionalCurrencyFunctionalCurrency

CurrentCurrent

CurrentHistoricala

CurrentCurrent

CurrentCurrent

CurrentHistorical

CurrentHistorical

CurrentHistorical

CurrentHistorical

CurrentCurrent

CurrentCurrent

CurrentCurrent

CurrentCurrent

CurrentCurrent

HistoricalHistorical

HistoricalHistorical

BalancingResidualBalancingResidual

AverageAverage

AverageAverage

CostofSales

Average

Historical

Generalandadministrativeexpenses

Average

Average

Sellingexpenses

Average

Historical

Depreciation

Average

Historical

Amortizationofgoodwill

Average

Historical

Incometaxexpense

Average

Average

Inter-companyinterestexpense

Average

Average

aFixedincomesecuritiesintendedtobeheldtomaturity.

11.a.Beforeriyaldepreciation:

Cash

Inventory

FixedAssets

Total

SAR60,000,000120,000,000750,000,000

SAR3.75=SAR3.75=SAR3.75=

$16,000,000

32,000,000

200,000,000

$248,000,000

Afterriyaldepreciation:

CashSAR60,000,000SAR4.125=$14,545,455

Inventory120,000,000SAR3.75=32,000,000

FixedAssets750,000,000SAR3.75=200,000,000

Total$246,545,455

Translationloss$(1,454,455)

b.ThetranslationlosshasnoeffectonMSC’scashflowsasitistheresultofarestatementprocess.

c.Onapre-taxbasis,ananalystwouldbackoutthetranslationgainfromreportedearningsandaddittoconsolidatedequity.However,inadditioninventoryandfixedassetswouldbetranslatedatthecurrentrate,asopposedtothehistoricalrate,andtheresultingtranslationlosswouldalsobetakentoconsolidatedequity.Thiswouldresultinadifferentearningsnumberaswellasassetmeasures.

Beforeriyaldepreciation:

CashSAR60,000,000SAR3.75=$16,000,000

Inventory120,000,000SAR3.75=32,000,000

FixedAssets750,000,000SAR3.75=200,000,000

Total$248,000,000

Afterriyaldepreciation:

CashSAR60,000,000SAR4.125=$14,545,455

Inventory120,000,000SAR4.125=29,090,909

FixedAssets750,000,000SAR4.125=181,818,182

Total$225,454,546

Translationadjustnmentreflectedinequity$(22,545,454)

StudentscouldalsobeprobedandaskedhowtheadjustednumberswouldimpactcertainratiossuchasROAorROE,DebttoEquity,andassetturnover.

12.a.ThecurrencyeffectsinthefirstandthirdparagraphshaveanimpactonAlcan’scashflows.INthefirstparagraph,echangeratechangesaffectAlcan’sfuturerevenuesandcostsanddirectlyaffectcashreceiptsand

ithutrnltin/%%%

payments.Thethirdparagraphinvolvessettlingforeigncurrencytransactionsatadifferentechangeratethanwhenthetransactionwereenteredinto.

b.Alcanappearstobeemployingthemonetary-nonmonetarymethod.

c.Manyanalystsbackouttranslationgainsandlossesfromreportedearningsasthesearelargelynon-cashitemsthatsimplyresultfromarestatementprocess.ThiswouldespeciallybethecaseifAlcanwerebeingcomparedtoacompanyemployingthecurrentratemethod.Disregardingtranslationgainsandlosseswouldhavethefollowingeffectonreportedearnings:

20X5

20X4

20X3

WithtranslationG/L

$129m

$258m

$64m

TranslationG/L

(86)

(153)

(326)

WithoutTranslationG/L$215m$411m$390m

Theimpactonthepatternofearningswouldchangesignificantly.Theyeartoyearchangesinearningsbothbeforeandafterabstractingfromcurrencytranslationeffectsare:

20X5/20X320X5/20X420X4/20X3

WithtranslationG/L102%-50%303%

W

oTas

aoGL

45

-48

5

Case6-1RegentsCorporation

ThenatureofRegents’soperationissuchthatchoiceofanappropriatefunctionalcurrencyisultimately

ajudgementcall.Studentscanargueforeithercurrencyandshouldbeevaluatedonthestrengthoftheir

analysis.Amajorlessonofthiscaseisthatthefunctionalcurrencychoiceisimportantsincethe

currencydesignationdictateswhichtranslationmethod,(currentortemporal)isultimatelyused.The

financialstatementeffectscanbeverydifferent.Thusitisimportantforareaderoffinancialstatementstounderstandhowthedifferingmeasurementoptionsaffectthebalancesheetandincomestatementand

bepreparedtoadjustfromoneframeworktotheother,evenifonlycrudely.

TEMPORALMETHOD

(U.S.DOLLARISTHEFUNCTIO