Chap007international accounting Doupnik and perara.docVIP

CHAPTER 7 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS Chapter Outline I. In preparing consolidated financial statements on a worldwide basis, the foreign currency financial statements prepared by foreign operations must be translated into the parent company’s reporting currency. A. The two major issues related to the translation of foreign currency financial statements are: (1) which method should be used, and (2) where should the resulting translation adjustment be reported in the consolidated financial statements. B. Translation methods differ on the basis of which accounts are translated at the current exchange rate and which are translated at historical rates. Accounts translated at the current exchange rate are exposed to translation adjustment (balance sheet exposure). C. Different translation methods give rise to different concepts of balance sheet exposure and translation adjustments of differing sign and magnitude. II. Under the current rate method, all assets and liabilities are translated at the current exchange rate giving rise to a balance sheet exposure equal to the foreign subsidiary’s net assets. Stockholders’ equity accounts are translated at historical exchange rates. Income statement items are translated at the average exchange rate for the current period. A. Appreciation of the foreign currency results in a positive translation adjustment; depreciation of the foreign currency results in a negative translation adjustment. B. Translating all assets and liabilities at the current exchange rate maintains the relationships that exist in the foreign currency financial statements. B. Translating assets carried at historical cost at the current exchange rate results in amounts being reported on the parent’s consolidated balance sheet that have no economic meaning. III. Under the temporal method, assets carried at current or future value (cash, marketable securities, receivables) and liabilities are remeasured at the current exchang