Chapter 10: Translation of Foreign Currency Financial Statements Flashcards
functional currency
the primary currency of the foreign entity’s operating environment
If a foreign currency is the functional currency
the foreign entity’s financial statements are “translated” using the current rate method and the resulting translation adjustment is reported as a separate component of equity
If the U.S dollar is the functional currency
foreign currency financial statements are remeasured using the temporal method with remeasurement gains and losses reported in operating income
If a foreign entity operates in a highly inflationary economy
- cumulative three year inflation greater than 100%
its financial statements are remeasured using the temporal method and remeasurement gains and losses are reported in income
Temporal method
gain or loss in net income
current rate method
separate component of AOCI
translation
used to express the financial results of a business unit into the parent’s functional currency
remeasurement
used to measure the financial results that are stated in another currency into the functional currency of the business
historical exchange rate
the exchange rate that existed when a transaction occurred
current exchange rate
the exchange rate that exists at the balance sheet date
What are the two translation methods?
the temporal method and the current rate method
translation using the current rate method
Assets and liabilities (including contra- assets and contra-liabilities) Current rate
Stockholders’ equity accounts
Historical rate
Revenues and expenses (which occur evenly throughout the period) and other Income statement accounts
Average rate
Revenues and expenses, which result of discrete event (ex: Gains, losses)
Historical rate
Dividends
Historical
Remeasurement using the temporal method
Temporal method
Assets and liabilities (at current or future value): monetary assets Current rate
Assets and liabilities (at cost) and related accounts: noncurrent assets Historical rate
Stockholders’ equity accounts Historical rate
Revenues and expenses (which occur evenly throughout the period) and other Income statement accounts Average rate
Revenues and expenses, which result of discrete event (ex: Gains, losses) Historical rate
Expenses related to assets at cost; related to noncurrent assets (Ex: depreciation, amortization, depletion) Historical rate
Dividends Historical
Cost of goods sold under current rate method
average rate
Cost of goods sold under temporal method
different rates used
BI: historical rate
P: Average rate
EI: historical rate
