0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 13: Translation of Financial Statements of Foreign Affiliates
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. 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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2. Translating Financial Statements of Foreign Affiliates
Translation: the conversion of financial statements from one currency to another
Financial
statements
in U.S. dollars
Financial
statements
in Francs
Translation
obj 1

3. = the spot rate on the balance sheet date
Exchange Rates
Current exchange rate
= the spot rate on the balance sheet date
Historical exchange rate
= the spot rate on the transaction date
obj 1

4. Translation Objectives SFAS 52
Provide info that reflects “exposed economic effects of an exchange rate change on an entity’s cash flows and equity.”
Reflect in consolidated statements financial results of the individual entities as measured in their functional currencies.
$ ≠ ¥
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5. Functional Currency Definition: can be:
Functional currency of a foreign affiliate is the currency of the economic environment in which it primarily conducts its operations
can be:
local currency of the affiliate
the U. S. dollar
a third currency
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6. Functional Currency Indicators
cash flows
sales prices
sales market
expenses
financing
intercompany transactions
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7. 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? No
Yes
Yes
Function currency
= local currency
Function currency
= U.S. $
Function currency
= U.S. $
Remeasurement
Remeasurement
Translation
obj 3

8. Translation Methods Current Rate Method Translation
all assets and liabilities are translated using the current exchange rate
revenues and expenses - average exchange rate
Temporal Method
Remeasurement
monetary assets and liabilities - current exchange rate
assets and liabilities carried at historical cost - historical exchange rate
assets and liabilities carried at current value - current exchange rate
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9. Translation Process Books kept in local currency Local currency
Remeasure-
ment
Not
necessary
Temporal
method
Temporal
method
A third
currency
Local
currency
U.S.
dollar
Functional
currency
Not
necessary
Translation
Current
rate method
Current
rate method
Financial statements
in U. S. dollars
U.S. dollar
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10. Remeasurement VS Translation Temporal VS Current
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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11. Highly Inflationary Local Currency
Local currency is so volatile vs U.S. currency as to distort performance.
Remeasure “as if” functional currency is the U.S. dollar.
obj 6

12. Translation (Current Rate Method)
Assets and liabilities
Paid-in capital:
purchase
acquisition
pooling
Current exchange rate
Historical rate on the date of acquisition
Historical rate on the date of capital transaction of subsidiary
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13. Translation (Current Rate Method)
Beginning R/E
Dividends
Revenue and
expenses
Cumulative
translation adjustment
= Ending balance of last year
Historical rate when dividend is declared
Average exchange rate
= Balance amount in the balance sheet
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14. Translation (Current Rate Method)
= Balance amount in the balance sheet
“Other comprehensive income” in shareholders’ equity
Cumulative
translation
adjustment
Current year
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15. Remeasurement (Temporal Method)
Monetary assets and
liabilities carried at
current values
Nonmonetary assets
and liabilities carried
at current values
at historical costs
Current exchange rate
Historical rate on the date of transaction or acquisition
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16. Remeasurement (Temporal Method)
Paid-in capital:
purchase
acquisition
pooling
Historical rate on the date of acquisition
Historical rate on the date of capital transaction of subsidiary
obj 8

17. Remeasurement (Temporal Method)
Beginning R/E
Dividends
= Ending balance of last year
Historical rate when dividend is declared
obj 8

18. Remeasurement (Temporal Method)
Revenues and expenses related to assets and liabilities translated at historical rates (inventory cost and depreciation)
Other revenues and expenses
Historical rate used for the related asset or liability accounts
Average exchange rate
obj 8

19. Remeasurement (Temporal Method)
Net income
Current year
translation
adjustment
obj 8

20. Currency translation adjustment does not appear “above the line.”
Comprehensive Income
Currency translation adjustment does not appear “above the line.”
This adjustment is included in the statement of comprehensive income.
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21. 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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22. 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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23. Financial Statement Disclosure
Analysis of the cumulative translation adjustment includes
beginning and ending amounts
current 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
obj 10

24. Advanced Accounting by Debra Jeter and Paul Chaney
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