FRA - Multinational Operations Flashcards
Transaction of foreign currency transactions
- translated into functional currency at the exchange rates at the date of transaction
- monetary A/L at the B/S date are re-valued at the exchange rate date
- diff. arising on the transaction are recognized on I/S
Local currency <> Functional
Temporal method - remeasurement
Functional <> Reporting
Current rate method - translation
Monetary A/L
Current rate
Non-monetary (inventories, u/r)
Historical under Temporal
Current under Current
Capital equity
Historical in both method
I/S statement
Use average under Current
Use average under Temporal, except for COGS use historical
G/L in translateion
under temporal: I/S as re-measurement
affect retained earnings
under Current:
B/S equity, result in CTA (g/s is added/subtracted to/from beg. CTA
FIFO
Temporal method: ENDING inventories remeasured at relatively recent rate
COGS: use first purchase cost of inventory
LIFO
Temporal method: ending inventories remeasured at relatively older rate
COGS: at new inventory cost
Retained earnings as a plug
BB R/E
+NI
-Dividend
=Ending R/E
Temporal method exposure
monetary asset - monetary liabilities
Current rate exposure
shareholder’s equity
flow effect
change in exposure in LC * (ending rate - average rate)
holding g/l effect
bb exposure in LC * (ending -beg)
Financial ratios when LC currency appreciate
under current method:
pure B/S and I/S ratios don’t change
B/S, I/S mixed ratios, lower ratios
Financial ratios when LC currency depreciate
under current method:
pure B/S and I/S ratios don’t change
B/S, I/S mixed ratios, higher ratios
Hyperinflation economies
cumulative 3-year inflation > 100% (26% per year on average)
translation in hyperinflation economy
IFRS
- monetary a/l not restated
- non-monetary a/l restated for changes in the general purchasing power of the monetary unit
- all components of shareholders’ equity are restated by applying the change in the general price level from the beginning of the period
restate carrying value using inflation rate and apply current exchange rate, to get CTA
g/l recorded on I/S
effective tax rate impact of foreign taxes caused by
- changes in applicable tax rates
2. changes in the mix of profits earned in different jurisdictions
Which TRANSLATION method should be used under a hyperinflationary economy when using U.S. GAAP?
if reporting = functional currency, the temporal method is more appropriate because all non-monetary accounts are remeasured at the historical rate. No restatement is needed.
Under IFRS, the financials would be restated for inflation, and then translated under the current rate method.
Deferred revenue
is a non-monetary liability and should be translated at the historic rate.
