1、Choi/Meek,6/e1International Accounting,6/eFrederick D.S.ChoiGary K.MeekChapter 6:Foreign Currency TranslationChoi/Meek,6/e2Learning Objectives lWhy do firms translate from one currency to another?lWhat is the difference between a spot,forward,and swap transaction?lWhat exchange rates are used in the
2、 currency translation process and what are their financial statement effects?Choi/Meek,6/e3lHow does a translation gain or loss differ from a transactions gain or loss?lIs there more than one way of translating financial statements from one currency to another?If so,what are they?lHow does the tempo
3、ral method of currency translation differ from the current rate method?lWhat is the relationship between currency translation and inflation?Choi/Meek,6/e4Why do Firms Translate?lFacilitates the preparation of consolidated financial statements that allow readers to see the performance of a multinatio
4、nal companys total operations both domestic and foreign.lFacilitates the measurement of a firms exposure to foreign exchange risk.Choi/Meek,6/e5lFacilitates the recording of foreign currency transactions;i.e.,foreign currency sales,purchases,borrowing or lending in the consolidated entitys reporting
5、 currency.lFacilitates reporting domestic accounts to foreign audiences-of-interest.Choi/Meek,6/e6Types of Transaction RateslSpot transactions:the physical exchange of one currency for another in which delivery takes place immediately.lDirect quote:the exchange rate specifies the number of domestic
6、currency units needed to acquire a unit of foreign currency.lIndirect quote:the exchange rate specifies the price of a unit of the domestic currency in terms of the foreign currency.Choi/Meek,6/e7lForward transaction:agreements to exchange a specified amount of one currency for another at a future d
7、ate.lSwap transaction:involves the simultaneous spot purchase and forward sale,or spot sale and forward purchase of a currency.Choi/Meek,6/e8Accounting for Spot Transactions lSpot transaction:occurs when an enterprise purchases or sells goods for which payment is made in a foreign currency,or when i
8、t borrows or lends foreign currency.lAt the transaction date,each asset,liability,revenue,and expense denominated in a foreign currency is measured and recorded in the functional currency of the reporting entity at the spot exchange rate in effect on that date.Choi/Meek,6/e9 Functional currency is t
9、he primary currency in which the reporting entity transacts business and generates and spends cash;e.g.,dollars in the case of a U.S.reporting entity.lAt each balance sheet date,recorded balances denominated in a currency other than the functional currency of the reporting entity is adjusted to refl
10、ect the current exchange rate.Choi/Meek,6/e10Accounting for Spot Transactions(contin)lA foreign exchange gain or loss is recorded whenever the exchange rate changes between the original transaction date and the settlement date,or between the original transaction date and the financial statement date
11、 should financial statements be prepared prior to settlement.Choi/Meek,6/e11 Example:On September 1,a calendar year U.S.manufacturer sells,on 90-day credit,goods to a Swedish importer for SEK 1,000,000.The dollar/krona exchange rate is$0.14=SEK1 on September 1,$0.13=SEK 1 on September 30,and$0.11=SE
12、K 1 on December 1.Choi/Meek,6/e12Choi/Meek,6/e13Types of Translation Rates and their Statement Effects lHistorical rate:the exchange rate prevailing when a foreign currency asset was first acquired or a foreign currency liability first incurred.lPreserves the original cost equivalent of a foreign cu
13、rrency item in the reporting currency.lUse of historical rates do not give rise to translation gains or losses,which are increases or decreases in the reporting currency equivalent of the foreign currency.Choi/Meek,6/e14lCurrent rate:the exchange rate prevailing as of the financial statement date.lC
14、hanges the reporting currency equivalent of a foreign currency item whenever exchange rates change.lUse of the current rate gives rise to translation gains and losses.lAverage rate:a simple or weighted average of either historical or current exchange rates.Choi/Meek,6/e15Translation vs.Transaction G
15、ains or LosseslTranslation gains or losses:result from a restatement process.lTransactions gains or losses:result from the physical exchange of one currency for another.Choi/Meek,6/e16lGain or loss on a settled transaction:arises whenever the exchange rate used to book the original transaction diffe
16、rs from the exchange rate used at settlement.lGain or loss on an unsettled transaction:arises whenever consolidated financial statements are prepared before settlement and the current rate has changed since the transaction date.lIs similar to a translation gain or loss as it results from a restateme
17、nt process.Choi/Meek,6/e17Choi/Meek,6/e18Types of Translation Methods lSingle rate method:applies a single exchange rate,the current rate,to all foreign currency assets and liabilities.lMultiple rate methods:Use some combination or current and historical rates to translate foreign currency balances.
18、Choi/Meek,6/e19Choi/Meek,6/e20Current-Noncurrent MethodlCurrent assets and current liabilities translated at the current rate.lNoncurrent assets and liabilities translated at the historical rate.lRevenues and expenses(excluding depreciation and amortization)translated at average rates.lDepreciation
19、and amortization charges at historical rates in effect when related assets are acquired.Choi/Meek,6/e21Choi/Meek,6/e22Choi/Meek,6/e23Monetary-Nonmonetary Method lMonetary assets and liabilities translated at current rates.lNonmonetary assets and liabilities translated at historical rates.Choi/Meek,6
20、/e24lRevenues and expenses,excluding depreciation,amortization and cost of sales,at average rates.lDepreciation,amortization charges,and cost of sales at historical rates in effect when related assets are acquired.lSee Exhibits 6-8 and 6-9.Choi/Meek,6/e25Temporal MethodlMonetary assets and liabiliti
21、es translated at the current rate.lNonmonetary items translated at rates that preserve their original measurement bases.lForeign currency balances at historical cost are translated at historical rates.lForeign currency balances at current cost or market value are translated at the current rate.Choi/
22、Meek,6/e26lRevenues and expenses,including cost of sales if inventories are carried at market,at average rates.lDepreciation,amortization charges,and cost of sales when inventories are carried at cost,at historical rates in effect when related assets are acquired.lSee Exhibits 6-8 and 6-9.Choi/Meek,
23、6/e27Current(Single)Rate MethodlAll foreign assets and liabilities translated at the current rate.lAll revenues and expenses are translated by an appropriately weighted average of current exchange rates for the period.lSee Exhibits 6-8 and 6-9.Choi/Meek,6/e28Features of FASB 52 and IAS 21lObjectives
24、lReflect in consolidated statements the financial results and relationships measured in the primary currency in which each consolidated entity does business.lProvide information compatible with the expected economic effects of an exchange rate change on an entitys cash flows and equity.Choi/Meek,6/e
25、29lObjectives based on the notion of a functional currency defined earlier.lFunctional currency can be the parent currency.lFunctional currency can be the local currency.Choi/Meek,6/e30Choi/Meek,6/e31Features of FASB 52 and IAS 21(contin)lTranslation when the parent currency is functional.lForeign c
26、urrency financial statements remeasured to reporting currency using the temporal method.lTranslation gains and losses resulting from the translation process are included in current income.Choi/Meek,6/e32lTranslation when the local currency is functional.lForeign currency financial statements transla
27、ted to reporting currency using the current rate method.lTranslation gains and losses disclosed as a separate component of consolidated equity.Choi/Meek,6/e33Relationship Between Foreign Currency Translation and InflationlThe external value of a countrys currency is inversely related to its rate of
28、inflation.lIAS 21 permits restatement for local inflation prior to currency translation.Choi/Meek,6/e34lFAS 52 requires use of the parent currency as the functional currency for foreign operations located in hyperinflationary environments(i.e.,countries where the cumulative rate of inflation exceeds 100%over a three-year period).Choi/Meek,6/e35Choi/Meek,6/e36Choi/Meek,6/e37Choi/Meek,6/e38Choi/Meek,6/e39Choi/Meek,6/e40Choi/Meek,6/e41Other Chapter Exhibits(contin)
