《Foreign_Currency_Translation》.ppt

Chapter 7 Translation of Foreign Currency Financial Statements Translation of Foreign Currency Financial Statements Conceptual issues of foreign currency financial statements translation. Balance sheet vs. transaction exposure. Methods of financial statement translation. Temporal and current rate methods illustrated. U.S. GAAP, IFRSs, and other standards related to translation. Hedging balance sheet exposure. Translating Foreign Currency Financial Statements -- Conceptual Issues Foreign country operations usually prepare financial statements using local currency as the monetary unit. These financial statements must be translated into home country currency. These operations also typically use local GAAP. Financial statements must be translated into home country GAAP. Translating Foreign Currency Financial Statements -- Conceptual Issues Primary conceptual issues Each financial statement item must be translated using some, hopefully relevant, exchange rate. What rate should be used? the current exchange rate? The average exchange rate? the historical exchange rate? Given that any adjustment is, at the point of translation, unrealized, how should the resulting adjustment be recognized? in current income? in an equity account on the balance sheet? Balance Sheet Exposure Assets and liabilities translated at the current exchange rate are exposed to risk of a translation adjustment. When foreign currency appreciates, a net asset exposure results in a positive translation adjustment. When foreign currency appreciates, a net liability exposure results in a negative translation adjustment. Assets and liabilities translated at the historical exchange rate are not exposed to a translation adjustment. A simple example Let’s say XYZ has a 1000 euro current note receivable on its books. The euro/$ direct rate is $ 1 on 1/1. On 12/31, it is $1.20. Should we record: No change? An increase in value of $200? An increase in value of $100? And if we do report a change, whe