1、Chap14Management-of-Translation-Exposure国际财务管理英文版Chapter OutlinelTranslation MethodslFASB Statement 8lFASB Statement 52lManagement of Translation ExposurelEmpirical Analysis of the Change from FASB 8 to FASB 52Translation MethodslCurrent/Noncurrent MethodlMonetary/Nonmonetary MethodlTemporal Methodl
2、Current Rate MethodCurrent/Noncurrent MethodlThe underlying principal is that assets and liabilities should be translated based on their maturity.nCurrent assets translated at the spot rate.nNoncurrent assets translated at the historical rate in effect when the item was first recorded on the books.l
3、This method of foreign currency translation was generally accepted in the United States from the 1930s until 1975,at which time FASB 8 became effective.Current/Noncurrent MethodnCurrent assets translated at the spot rate.e.g.DM2=$1nNoncurrent assets translated at the historical rate in effect when t
4、he item was first recorded on the books.e.g.DM3=$1Balance SheetLocal CurrencyCurrent/Noncurrent Cash2,100 DM$1,050 Inventory1,500 DM$750 Net fixed assets3,000 DM$1,000 Total Assets6,600 DM$2,800 Current liabilities1,200 DM$600 Long-Term debt1,800 DM$600 Common stock2,700 DM$900 Retained earnings900
5、DM$700CTA-Total Liabilities and Equity6,600 DM$2,800 Monetary/Nonmonetary MethodlThe underlying principal is that monetary accounts have a similarity because their value represents a sum of money whose value changes as the exchange rate changes.lAll monetary balance sheet accounts(cash,marketable se
6、curities,accounts receivable,etc.)of a foreign subsidiary are translated at the current exchange rate.lAll other(nonmonetary)balance sheet accounts(owners equity,land)are translated at the historical exchange rate in effect when the account was first recorded.Monetary/Nonmonetary MethodlAll monetary
7、 balance sheet accounts are translated at the current exchange rate.e.g.DM2=$1lAll other balance sheet accounts are translated at the historical exchange rate in effect when the account was first recorded.e.g.DM3=$1Balance SheetLocal CurrencyMonetary/NonmonetaryCash2,100 DM$1,050 Inventory1,500 DM$5
8、00 Net fixed assets3,000 DM$1,000 Total Assets6,600 DM$2,550 Current liabilities1,200 DM$600 Long-Term debt1,800 DM$900 Common stock2,700 DM$900 Retained earnings900 DM$0CTA-Total Liabilities and Equity6,600 DM$2,400 Temporal MethodlThe underlying principal is that assets and liabilities should be t
9、ranslated based on how they are carried on the firms books.lBalance sheet account are translated at the current spot exchange rate if they are carried on the books at their current value.lItems that are carried on the books at historical costs are translated at the historical exchange rates in effec
10、t at the time the firm placed the item on the books.Temporal MethodlItems carried on the books at their current value are translated at the spot exchange rate.e.g.DM2=$1lItems that are carried on the books at historical costs are translated at the historical exchange rates.e.g.DM3=$1Balance SheetLoc
11、al CurrencyTemporalCash2,100 DM$1,050 Inventory1,500 DM$900Net fixed assets3,000 DM$1,000 Total Assets6,600 DM$2,950 Current liabilities1,200 DM$600 Long-Term debt1,800 DM$900 Common stock2,700 DM$900 Retained earnings900 DM$0CTA-Total Liabilities and Equity6,600 DM$2,400 Current Rate MethodlAll bal
12、ance sheet items(except for stockholders equity)are translated at the current exchange rate.lVery simple method in application.lA“plug”equity account named cumulative translation adjustment is used to make the balance sheet balance.Current Rate MethodlAll balance sheet items(except for stockholders
13、equity)are translated at the current exchange rate.lA“plug”equity account named cumulative translation adjustment is used to make the balance sheet balanceBalance SheetLocal CurrencyCurrent RateCashDM2,100$1,050 InventoryDM1,500$750 Net fixed assetsDM3,000$1,500 Total AssetsDM6,600$3,300 Current lia
14、bilitiesDM1,200$600 Long-Term debtDM1,800$900 Common stockDM2,700$900 Retained earningsDM900$360 CTA-$540 Total Liabilities and EquityDM6,600$3,300 How Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent R
15、ateCash2,100 DM$1,050$1,050$1,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$900 Common stock2,700 DM$900$900$900$900 Retained ear
16、nings900 DM$700$150$550$360CTA-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 Spot exchange rateearningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateCash2,100 DM$1,050$1,0
17、50$1,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$900 Common stock2,700 DM$900$900$900$900 Retained earnings900 DM$700$150$550$3
18、60CTA-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 Book value of inventory at spot exchange rateBook value of inventory historic rateCurrent value of inventory at spot exchange rate.earningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal C
19、urrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateCash2,100 DM$1,050$1,050$1,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$60
20、0$900$900$900 Common stock2,700 DM$900$900$900$900 Retained earnings900 DM$700$150$550$360CTA-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 historic ratespot exchange rate.earningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurr
21、ent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateCash2,100 DM$1,050$1,050$1,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$9
22、00 Common stock2,700 DM$900$900$900$900 Retained earnings900 DM$700$150$550$360CTA-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 spot rateearningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurrent/Noncurrent Monetary/Nonmonetar
23、yTemporalCurrent RateCash2,100 DM$1,050$1,050$1,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$900 Common stock2,700 DM$900$900$90
24、0$900 Retained earnings900 DM$700$150$550$360CTA-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 spot ratehistorical rateearningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent Ra
25、teCash2,100 DM$1,050$1,050$1,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$900 Common stock2,700 DM$900$900$900$900 Retained earn
26、ings900 DM$700$150$550$360CTA-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 historical rateearningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateCash2,100 DM$1,050$1,050$1
27、,050$1,050 Inventory1,500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$900 Common stock2,700 DM$900$900$900$900 Retained earnings900 DM$700$150$550$360CT
28、A-$540 Total Liabilities and Equity6,600 DM$2,800$2,550$2,950$3,300 From income statementearningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1Balance SheetLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateCash2,100 DM$1,050$1,050$1,050$1,050 Inventory1,
29、500 DM$750$500$900$750 Net fixed assets3,000 DM$1,000$1,000$1,000$1,500 Total Assets6,600 DM$2,800$2,550$2,950$3,300 Current liabilities1,200 DM$600$600$600$600 Long-Term debt1,800 DM$600$900$900$900 Common stock2,700 DM$900$900$900$900 Retained earnings900 DM$700$150$550$360CTA-$540 Total Liabiliti
30、es and Equity6,600 DM$2,800$2,550$2,950$3,300 Under the current rate method,a“plug”equity account named cumulative translation adjustment makes the balance sheet balance.earningsHow Various Translation Methods Deal with a Change from DM3 to DM2=$1For notes,see Exhibit 14.1Income StatementLocal Curre
31、ncyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateSales10,000 DM$4,000$4,000$4,000$4,000COGS7,500 DM$3,000$2,500$3,000$3,000Depreciation1,000 DM$333$333$333$400Net operating income1,500 DM$667$1,167$667$600Income tax(40%)600 DM$267$467$267$240Profit after tax900 DM$400$700$400$360$300-$5
32、50$150Net income900 DM$700$150$550$360Dividends0 DM$0$0$0$0Addition to Retained Earnings900 DM$700$150$550$360Foreign exchange gain(loss)Sales translate at average exchange rate over the period,DM2.50=$1How Various Translation Methods Deal with a Change from DM3 to DM2=$1For notes,see Exhibit 14.1In
33、come StatementLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateSales10,000 DM$4,000$4,000$4,000$4,000COGS7,500 DM$3,000$2,500$3,000$3,000Depreciation1,000 DM$333$333$333$400Net operating income1,500 DM$667$1,167$667$600Income tax(40%)600 DM$267$467$267$240Profit after tax900
34、DM$400$700$400$360$300-$550$150Net income900 DM$700$150$550$360Dividends0 DM$0$0$0$0Addition to Retained Earnings900 DM$700$150$550$360Foreign exchange gain(loss)Translate at DM2.50=$1Translate at new exchange rate,DM2.00=$1How Various Translation Methods Deal with a Change from DM3 to DM2=$1For not
35、es,see Exhibit 14.1Income StatementLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateSales10,000 DM$4,000$4,000$4,000$4,000COGS7,500 DM$3,000$2,500$3,000$3,000Depreciation1,000 DM$333$333$333$400Net operating income1,500 DM$667$1,167$667$600Income tax(40%)600 DM$267$467$267$24
36、0Profit after tax900 DM$400$700$400$360$300-$550$150Net income900 DM$700$150$550$360Dividends0 DM$0$0$0$0Addition to Retained Earnings900 DM$700$150$550$360Foreign exchange gain(loss)Translate at DM3=$1Translate at average exchange rate,DM2.5=$1How Various Translation Methods Deal with a Change from
37、 DM3 to DM2=$1For notes,see Exhibit 14.1Income StatementLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateSales10,000 DM$4,000$4,000$4,000$4,000COGS7,500 DM$3,000$2,500$3,000$3,000Depreciation1,000 DM$333$333$333$400Net operating income1,500 DM$667$1,167$667$600Income tax(40%)
38、600 DM$267$467$267$240Profit after tax900 DM$400$700$400$360$300-$550$150Net income900 DM$700$150$550$360Dividends0 DM$0$0$0$0Addition to Retained Earnings900 DM$700$150$550$360Foreign exchange gain(loss)Note the effect on after-tax profit.How Various Translation Methods Deal with a Change from DM3
39、to DM2=$1For notes,see Exhibit 14.1Income StatementLocal CurrencyCurrent/Noncurrent Monetary/NonmonetaryTemporalCurrent RateSales10,000 DM$4,000$4,000$4,000$4,000COGS7,500 DM$3,000$2,500$3,000$3,000Depreciation1,000 DM$333$333$333$400Net operating income1,500 DM$667$1,167$667$600Income tax(40%)600 D
40、M$267$467$267$240Profit after tax900 DM$400$700$400$360$300-$550$150Net income900 DM$700$150$550$360Dividends0 DM$0$0$0$0Addition to Retained Earnings900 DM$700$150$550$360Foreign exchange gain(loss)Note the effect that foreign exchange gains(losses)has on net income.FASB Statement 8lEssentially the
41、 temporal method,with some subtleties.nSuch as translating inventory at historical rates,which is a hassle.lRequires taking foreign exchange gains and losses through the income statement.lThis leads to variability in reported earnings.lWhich leads to irritated corporate executives.FASB Statement 52l
42、The Mechanics of the FASB 52 Translation ProcessnFunction CurrencynReporting CurrencylHighly Inflationary EconomiesThe Mechanics of FASB Statement 52lFunction CurrencynThe currency that the business is conducted in.lReporting CurrencynThe currency in which the MNC prepares its consolidated financial
43、 statements.The Mechanics of FASB Statement 52lTwo-Stage ProcessnFirst,determine in which currency the foreign entity keeps its books.nIf the local currency in which the foreign entity keeps its books is not the functional currency,remeasurement into the functional currency is required.nSecond,when
44、the foreign entitys functional currency is not the same as the parents currency,the foreign entitys books are translated using the current rate method.Current RateTranslationParents CurrencyForeign entitys books kept in?Parents Currency Functional Currency?Local currencyTemporal RemeasurementParents
45、 currency NonparentCurrencyThird currencyThe Mechanics of FASB Statement 52Highly Inflationary EconomieslForeign entities are required to remeasure financial statements using the temporal method“as if the functional currency were the reporting currency”.Management of Translation ExposurelTranslation
46、 Exposure vs.Transaction ExposurelHedging Translation ExposurenBalance Sheet HedgenDerivatives HedgelTranslation Exposure vs.Operating ExposureTranslation Exposure versus Transaction ExposurelTranslation ExposurenThe effect that unanticipated changes in exchange rates has on the firms consolidated f
47、inancial statements.nAn accounting issue.lTransaction ExposurenThe effect that unanticipated changes in exchange rates has on the firms cash flows.nA finance issue and the subject of Chapter 13.lIt is generally not possible to eliminate both translation exposure and transaction exposure.Hedging Tran
48、slation ExposurelIf the managers of the firm wish to manage their accounting numbers as well as their business,they have two methods for dealing with translation exposure.nBalance Sheet HedgenDerivatives HedgeBalance Sheet HedgelEliminates the mismatch between net assets and net liabilities denomina
49、ted in the same currency.lMay create transaction exposure,however.Derivatives HedgelAn example would be the use of forward contracts with a maturity of the reporting period to attempt to manage the accounting numbers.lUsing a derivatives hedge to control translation exposure really involves speculat
50、ion about foreign exchange rate changes,however.Translation Exposure versus Operating ExposurelThe effect that unanticipated changes in exchange rates has on the firms ongoing operations.lOperating exposure is a substantive issue with which the management of the firm should concern itself with.Empir
