Reading 11: Multinational Operations Flashcards
Types of Currencies
- Local currency: currency of the country being referred to
- Functional currency: determined by management. Currency of the primary economic environment in which the entity operates.
- Presentation (reporting) currency: currency in which the parent company prepares its financial statements.
Methods for Remeasurement/Translation of Local Currencies
- Local currency Functional currency —current rate method—>Presentation currency
- Local currency —temporal method—> Functional currency Presentation currency
- Local currency —temporal method—> Functional currency —current rate method—> Presentation currency
Temporal Method Summary
- Monetary A&L: Current Rate
- Nonmonetary A&L: Historical
- Common Stock: Historical
- Equity: Mixed*
- Revenues and SG&A: Average
- COGS: Historical
- Depr and amort: Historical
- Net Income: Mixed
- Exposure: net monetary assets
- Exchange rate G/L: Income Statement
*Rev, COGS, SG&A all measured at different rates
Current Rate Method Summary
- Monetary A&L: Current Rate
- Nonmonetary A&L: Current Rate
- Common Stock: Historical
- Equity: Current Rate
- Revenues and SG&A: Average
- COGS: Average
- Depr and amort: Average
- Net Income: Average
- Exposure: Net Assets
- Exchange rate G/L: Equity
Cumulative Translation Adjustment/Remeasurement
Current Rate Method (CTA)
-CTA is simply a “plug” figure that forces the basic accounting equation (A = L + E) to balance
-accumulated balance of all of the translation gains and losses at a point in time.
-reported in shareholders equity
Temporal Method (Remeasurement)
-Is the difference in earnings before the gain or loss and after the gain or loss
-measured in the income statement
Impact of Changing Exchange Rates
-Current Rate Method
Apprec: Net Assets (gain), Net Liab (loss)
Deprec: Net Liab (loss), Net Assets (gain)
-Temporal Method
Apprec: Net Monetary Assets (gain), Net Monetary Liab (loss)
Deprec: Net Monetary Liab (loss), Net Monetary Assets (gain)
Pure Balance Sheet and Income Statement Ratios
-Unaffected by the application of the current method
Mixed Ratios
- Combines inputs from income statement and balance sheet
- If foreign currency is depreciating, translated mixed ratios (with income statement item in numerator and end-of-period balance sheet item in denominator) will be larger than original ratio.
- If foreign currency is appreciating, translated mixed ratios (with income statement item in numerator and end-of-period balance sheet item in denominator) will be smaller than original ratio.
Hyperinflation
- Local currency depreciates rapidly against presentation currency
- Using current method, All A & L will lose their value and disappear in parent fin statements.
- In reality, non-monetary A&L is typically not affected
Hyperinflation (FASB)
- cumulative inflation exceed 100% over a 3-year period (26% per year)
- When present, the functional currency is considered to be the parent’s presentation currency; thus, temporal method is used to remeasure the fin statements
Hyperinflation (IASB)
- does not specifically define hyperinflation; however, cumulative inflation of over 100% in a 3-year period is indication that it exists.
- Restate for inflation and translate using the current exchange rate
Restating under IASB
- Nonmonetary A&L. multiply original cost by the change in the price index for the period b/w the acquisition date and the balance sheet date
- Do not restate monetary A&L
- Components of shareholders equity (other than retained earnings) are restated by applying the change in the price index from the beginning of the period or the date of contribution if later
- Retained Earnings are the plug figure that balance balance sheet
- In statement of retained earnings net income is the plug figure
- Income statement items are restated by multiplying by the change in the price index from the date the transactions occur.
- Net purchasing power gain or loss is recognized in the income statement based on the net monetary asset or liability exposure.
