Foreign Currency Translation Method
Xiaoqin Xu ACCT 6075
INTRODUCTION
In accounting, foreign currency translation is an important part when measuring a foreign subsidiary’s financial statements. Foreign companies keep the accounting records in the local currencies. In order to present the financial statements in the same reporting currency as for the parent company, the domestic firm must translate the foreign subsidiary’s financial statements from the foreign currency to the domestic currency. This is known as foreign currency translation. Consolidating financial statements between foreign subsidiaries and the parent companies would not be possible, if there is no foreign currency translation.
Foreign currency translation may use different exchange rates for different financial statement items. There are three main translation methods: current rate translation method, temporary rate translation method, monetary-nonmonetary translation method.
DETAILS OF METHODS
When the functional currency is the same as the local currency, the current rate method is applied. For example, a Shanghai subsidiary uses the RMB. Current rate method is required by SFAS #52 (FASB, 1981). When using the current rate method, all the assets and liabilities are translated in the current rate, which is on the date of the balance sheet. The items in the equity section excluding retained earnings are translated using historical rate, which is on the date of transaction. Income statement items are also using historical rate. However, because of the impracticability of using different rates for numerous items, the Financial Accounting Standards Board permits using an average rate of the time period’s translation rates, also for the retained earnings.
When the l...
... middle of paper ...
...asmina Bogicevic. 2013. Accounting Implication of Foreign Currency Transaction Translation and Hedging. Serbia. Economic Horizons.
Paul E. Hot. 2013. Critical Elements of Foreign Currency Translation: A Worldwide Informational and Accounting Problem. United States. American Journal of Economics and Business Administration.
Bloom Robert. 2011. International Accounting. Journal of International Accounting Research.
Lee, Seul Ki and Jang, SooCheong. 2010. Internationalization and Exposure to Foreign Currency Risk: An Examination of Lodging Firms. International Journal of Hospitality Management.
Pinto, Jo Ann M. 2002. Foreign Currency Translation Method Choice: Insight from Game Theory. Journal of Applied Business Research.
Allen Huang, Svetlana Vlady. 2012. The Accounting and Economic Effects of Currency Translation Standards. Journal of Modern Accounting and Auditing.
The net values of Belarus imported goods and services from other countries exceeded its export of goods and service to other countries creating a large Current Account Deficit. The reason Belarus a former Soviet republic scraped the currency trading restriction is due to the fact its political leadership allowed the Belarus national currency ruble to depreciate as part of a strategy to reduce the current account deficit. The unification of the exchange rates will allow the currency market ability to function as before. The overheated economy under a loose monetary policy created this crisis and the difficulties will be overcome by abolishing the restriction on currency trading. The political promise of 50% increase in wages to the government workers have impacted with no real values other than buying foreign currency and goods. According to Arkhipov and Abelsky (2011), abolishing the currency trading restriction is necessary given the current practice of doin...
...l language is also beneficial for comparison of statement, understanding, and saving cost for international companies.
Yeager, Leland B. "The Euro Facing Other Moneys." Cato Journal (2004): 27-40. Academic Search Complete.
exchange rates, etc). Aside from this quibble, the heart of the matter is to what degree
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
4. To what extent, if any, have you and your co-managers adapted your company's strategy to take shifting exchange rates into account? In other words, have you undertaken any actions to try to (a) minimize the impact of adverse shifts in exchange rates or (b) capitalize on the impact of favorable exchange rate shifts? Why or why not?
In the world of international finance there are two major accounting systems; GAAP, which stands for Generally Accepted Accounting Principles, and IFRS, which stands for International Financial Reporting Standards. The United States prefers GAAP while the European market, as well as many other countries, prefers IFRS. By 2015 the Securities Exchange Commission is anticipating a total transfer to IFRS in the United States. Though the differences between GAAP and IFRS are few, they could affect accuracy of financial reporting throughout the world. It is important to understand the differences and similarities between both GAAP and IFRS if one is to globalize ones market (Logue).
Wang, Jing 2008, ‘Why Are Exchange Rates So Difficult To Predict’, Economic Letter, Vol. 3, no. 6.
Expanding sales to foreign countries can offer a Multinational Company (MNC) higher profit margins, unique products, and technological advantages. One of the major issues that an MNC will face is analyzing foreign financial statements, due to the diversity of accounting guidelines across the world. It’s imperative that companies that decide to go international learn and understand the tax laws and guidelines of other countries, in order to minimize the accounting issues involved in business activities. One of the top coffee producing companies in the world, Starbucks Corp has grown to be a powerful MNC. Their investment in foreign operations and foreign trade requires them to understand international accounting concepts and international financial reporting standards (IFRS). In this report, GAAP concepts used by Starbuck’s will be compared to IFRS.
A consolidated financial statement can be defined as the financial statements of a parent and its subsidiaries combined to form a single economic entity (AASB 10, 2011). The entity, which acquires the other entity, is known as the parent and the entity, which has been acquired, is known as the subsidiary. Consolidation financial reports arise when one entity purchases another entity, to then form a group. The purpose of preparing the consolidated financial statements is to combine the identifiable assets and liabilities (and contingent liabilities) and equity of two separate entities. At the date of acquisition, assets and liabilities are measured at their fair value in order to ensure that assets are not overstated and liabilities not understated and also ensure more relevant information (IFRS 10, 2012).
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
According to The Star Online, up to 80% of the total group borrowings of RM7.49 billion were denominated in US dollar. Simultaneously, 8% of the total group borrowings were denominated in Euro currency. In other words, the total debt of the group that denominated in US currency worth at US$1.33 billion, approximately cost at RM5.91 billion. The total debt that denominated in Euro currency cost around €129.8 million, approximately cost at RM610.61 million. The high composition of debt in foreign currency caused the group extremely vulnerable to foreign exchange risk. A sensitivity analysis conducted by CIMB Research revealed that IOI could face RM148 million of loss or gain for foreign exchange translation risk with every RM0.10 rise/drop in Ringgit to US dollar exchange rate. Due to substantial losses on foreign exchange translation and fair value loss on derivative loss, the company predicted that the second quarter net profit of 2017 will be dropped by 98% to RM15.6 million, compared to the first quarter net profit recorded at RM703.7 million (Kok, 2017). Thus, foreign exchange risk is considered as high risk for
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...
What do we know about Currency and International Commerce? We all know it takes money to by commodities and services, but do we really comprehend why we use a specific currency. Lets’ look at what causes world powers to trade in one specific currency, what it means for the world economy, why the standard currencies change and are there any changes coming. But before we get into the aforementioned we must first define currency and International Commerce.