国际会计第七版英文版课后答案(第六章)

Chapter 6Foreign Currency TranslationDiscussion Questions Solutions 1. Foreign currency translation is the process of restating a foreign account balance from one currency to another. Foreign currency conversion is the process of physically exchanging one currency for another. 2. In the foreign exchange spot market, currencies bought and sold must be delivered immediately, normally within 2 business days. Thus a Singaporean tourist buying U.S. dollars at the airport before boarding a plane for New York would hand over Singapore dollars and immediately receive the equivalent amount in U.S. dollars. The forward market handles agreements to exchange a fixed amount of one currency for another on an agreed date in the future. For example, a French manufacturer exporting goods invoiced in euros to a Japanese importer on 60-day credit terms would buy a forward contract to sell yen for euros 2 months in the future. Transactions in the swap market involve the simultaneous purchase (or sale) of one currency in the spot market and the sale (or purchase) of the same currency in the forward market. Thus, a Canadian investor wishing to take advantage of higher interest rates on 6-month Treasury bills in the United States would buy U.S. dollars with Canadian dollars in the spot market and invest in the United States. To guard against a fall in the value of the U.S. dollar before maturity (when the U.S. dollar proceeds are converted back to Canadian dollars), the Canadian investor would simultaneously enter into a forward contract to sell U.S. dollars for Canadian dollars 6 months in the future at today s forward exchange rate.3. The question refers to alternative exchange rates that are used to translate foreign financial statements. The current rate is the exchange rate at the financial statement date. It is sometimes called the year-end or closing rate. The historical rate is the exchange rate at the time of the underlying transaction. The average rate is the average of various exchange rates during a fiscal period. Since the average rate normally is used to translate income statement items, it is often weighted to reflect any seasonal changes in the volume of transactions during the period.Translation gains and losses do not occur if exchange rates do not change. However, if exchange rates change, the use of current and average rates causes translation gains and losses. These do not occur when the historical rate is used because the same (constant) rate is used each period. 4. In this example, the Mexican Affiliate s Canadian dollar loan is denominated in Canadian dollars. However, because the Mexican affiliates functional currency is U.S. dollars, the peso equivalent of the Canadian dollar borrowing would be remeasured in U.S. dollars prior to consolidation. If the Mexican affiliates functional currency were the peso, the Canadian dollar loan would be remeasured in pesos before being translated to U.S. dollars. 5. A transaction gain or loss occurs when a foreign currency transaction, e.g., a foreign currency borrowing, is settled at a different exchange rate than that which prevailed when the transaction was originally incurred. In this case there is an exchange of one currency for another. A translation gain or loss, on the other hand, is simply the result of a restatement process. There is no physical exchange of currencies involved. 6. It is not possible to combine, add, or subtract accounting measurements expressed in different currencies; thus, it is necessary to translate those accounts that are measured or denominated in a foreign currency into a single reporting currency. Foreign currency translation can involve restatement or remeasurement. In restatement, the local (functional) currency is kept as the unit of measure; that is, the translation process multiplies the financial results and relationships in the local currency accounts by a constant, the current rate. In contrast, remeasurement translates local currency results as if the underlying transactions had taken place in the reporting (functional) currency of the parent company; for example, it changes the unit of measure of a foreign subsidiary from its local (foreign) currency to the U.S. dollar. 7. Major advantages and limitations of each of the major translation methods follow.Current Rate MethodAdvantages:a. Retains the initial relationships in the foreign currency statements.b. Simple to apply.Limitations:a. Violates the basic purpose of consolidation, which is to present the results of a parent and its subsidiaries as if they were a single entity.b. Inconsistent with historical cost.c. Presumes that all local assets and liabilities are subject to exchange risk.d. While stockholders equity adjustments shield an MNC s bottom line from translation gains and losses, such adjustments could distort certain financial ratios and be confusing.Current-noncurrent MethodAdvantages:a. Distortions in translated gross margins are reduced as inventories and translated at the current rate.b. Reported earnings are shielded from the distorting effects of currency fluctuations as excess translation gains are deferred and used to offset future translation losses.Limitations:a. Uses balance sheet classification as basis for translation.b. Assumes all current assets are exposed to exchange risk regardless of their form.c. Assumes long-term debt is sheltered from exchange rate risk.Monetary-nonmonetary MethodAdvantages:a. Reflects changes in domestic currency equivalent of long-term debt on a timely basis.Limitations:a. Assumes that only monetary assets and liabilities are subject to exchange rate risk.b. Exchange rate changes distort profit margins as sales transacted at current prices are matched against cost of sales measured at historical prices.c. Uses balance sheet classification as basis for translation.d. Nonmonetary items stated at current market values are translated at historical rates.Temporal MethodAdvantages:a. Theoretically valid: compatible with any accounting measurement method.b. Has the effect of translating foreign subsidiaries operations as if they were originally transacted in the home currency, which is desirable for foreign operations that are extensions of the parents activities.Limitation:a. A company increases its earnings volatility by recognizing translation gains and losses currently.In arguing for one translation method over another, your students should eventually realize that, in the present state of the art, there is probably no one translation method that is appropriate for all circumstances in which translations occur and for all purposes thattranslation serves. It is probably more fruitful to have students identify circumstances in which they think one translation method is more appropriate than another.8. The current rate method is appropriate when the foreign entity being consolidated is largely independent of the parent company. Conditions which would justify this methodology is when the foreign affiliate tends to generate and expend cash flows in the local currency, sells a product locally so that its selling price is largely insulated from exchange rate changes, incurs expenses locally, finances its self locally and does not have very many transactions with the parent company. In contrast, the temporal method seems appropriate in those instances when the foreign affiliates operations are integrally related to the parent company. Conditions which would justify use of the temporal method are when the foreign affiliate transacts business in the parent currency and remits such cash flows to the parent company, sells a product largely in the parent country and whose selling price is sensitive to exchange rate changes, sources its factor inputs from the parent company, receives most of its financing from the parent and has a large two way flow of transactions with it. oreign Currency Translationlow up and let you know as soon as I know.n do for you please do not hesitate to let me know.l vers9. The history of foreign currency translation in the United States suggests that the development of accounting principles does not depend on theoretical considerations so much as on political, institutional, and economic influences that affect accounting standard setting. It may be more realistic to recognize that theoretically sound solutions are impossible as long as policy prescriptions are evaluated on practical grounds. Without specific choice criteria derived from investor decision models, it is fruitless to argue the conceptual merits of competing accounting treatments. It is far more productive to admit that foreign currency translation choices are simply arbitrary.Readers of consolidated financial statements should know that the foreign currency translation method used is one of several alternatives, and this should be disclosed. This approach is more open and reduces the chance that readers will draw misleading inferences.8. al statement date. 10. Foreign inflation, in particular, the differential rate of inflation between the country in which a subsidiary is located and the country of its parent determines foreign exchange rates. These rates, in turn, are used to translate foreign currency balances to parent currency. 11. In the United Kingdom, financial statements of affiliates domiciled in hyperinflationary environments must first be adjusted to current price levels and then translated using the current rate; in the United States, the temporal method would be employed. The second part of this question is designed to get students from abroad to find out what companies in their home countries are doing and thereby be in a position to share their new found knowledge with their classmates. They need simply get on the internet and read the footnotes of a major multinational company in their home country. 12. Under FAS No. 52, the parent currency is designated as the functional currency for an affiliate, whose operations are considered to be an integral part of the parent companys operations. Accordingly, anything that affects consolidated earnings, including foreign currency translation gains and losses, is relevant to parent company shareholders and is included in reported earnings. In contrast, when a foreign affiliate s operations are independent of the parent s, the local currency is designated as its functional currency. Since the focus is on the affiliate s local performance, translation gains and losses that arise solely from consolidation are irrelevant and, therefore, are not included in consolidated income.Exercises Solutions1. 250,000,000 X .008557 = $2,139,250. 250,000,000 116.86 = $2, 139,312 The difference is due to rounding. 2. Since 1 = US$1.9590 and 1 = US$1.3256, 1 = US$1.9590/US$1.3256 = 1.4778.Alternatively, 1 = US$1.3256/US$1.9590 = .6767.3. Single Transaction Perspective:4/1 Purchases (32,500,000/116.91)$277,992Cash$27,800A/P(32,500,000 - 3,250,000)/116.91250,192(Credit purchase) 7/1 Purchases(29,250,000/116.91) (29,250,000/115.47)3,120A/P3,120(To record increase in purchases due to yen appreciation) 7/1 Interest expense(29,250,000 X .08 X 3/12)/115.47 5,066 A/P(29,250,000/115.47) 253,312Cash258,378(To record settlement) Two Transactions Perspective:4/1 Purchases$277,992Cash$27,800A/P250,1927/1 Transaction loss 3,120A/P 3,1207/1 Interest expense 5,066 A/P253,312Cash258,3784. a. MXN 1,750,000/MXN10.3 = C$169,903. b. The Canadian dollar equivalent of the Mexican inventory account would not change if the functional currency was the Canadian dollar as the temporal method translates inventory, a nonmonetary asset, at the exchange rate that preserves its original measurement basis. Since inventory is being carried at its net realizable value, it would be translated at the current rate. Had inventory been carried at historical cosuld have been translated at the historical rate or MXN3,750,000/MXN9.3 = C$403,226. 5. Baht is the functional currency:B 2,500,000/20 years = B 125,000B 125,000/B37 = 3,378B 5,000,000/20 years = B 250,000B 250,000/B37 = 6,757 U.S. dollar is the functional currency:B 2,500,000/20 years = B 125,000B 125,000/B40 = 3,125B 5,000,000/20 years = B 250,000B 250,000/B38 = 6,579Total depreciation$ 9,704 6. If the euro is the German subsidiarys functional currency, its accounts would be translated into Australian dollars using the current rate method. In this case the translation gain of AUD4,545,455 would appear in consolidated equity. Thus the only item affecting current income would be the transaction loss(loss on an unsettled transaction) of AUD1,514,515 on the euro borrowing. If the Australian dollar is deemed to be the functional currency, then the transaction loss and translation gain would both appear in reported earnings as follows:AUD(1,514,515) transaction lossAUD4,545,455 translation gainAUD3,030,940 net foreign exchange gain 7. U.S. Dollar U.S. DollarU.S. DollarBefore CNYAfter CNYAfter CNYAppreciationAppreciationDepreciationCNY Balance Sheet ($.12=CNY1) ($.15 = CNY1) ($0.09 = CNY1)Assets AmountCurrentMonetaryCurrent MonetaryNoncurrentNonmonetaryNoncurrent NonmonetaryCash NT5,000$600$ 750$ 750$ 450 $ 450Accts. Receivable 14,000 1,680 2,100 2,100 1,260 1,260Inventories(cost=24,000) 22,000 2,640 3,300 2,640 1,980 2,640Fixed assets, net 39,000 4,680 4,680 4,680 4,680 4,680Total CNY 80,000 $9,600 $10,830 $10,170 $8,370 $9,030Liabilities & Owners EquityAccts. Payable CNY21,000 $2,520 $ 3,150 $ 3,150$1,890 $1,890Long-term debt 27,000 3,240 3,2404,050 3,240 2,430 Stockholders equity 32,000 3,840 4,4402,970 3,240 4,710Total CNY 80,000 $9,600 $10,830 $10,170 $8,370 $9,030Accounting exposureCNY20,000(29,000)20,000 (29,000)Translation gain (loss)US$ 600 (870) (600) 8708. U.S. Dollar U.S. DollarU.S. DollarBefore CNYAfter CNYAfter CNYAppreciationAppreciationDepreciationCNY Balance Sheet ($.12=CNY1) ($.15 = CNY1) ($.09 = CNY1)Assets AmountTemporalCurrentTemporal CurrentCashCNY5,000 $ 600$ 750$ 750$ 450 $ 450Accts. Receivable 14,000 1,680 2,100 2,100 1,260 1,260Inventories(cost=24,000) 22,000 2,640 3,300 3,300 1,980 1,980Fixed assets, net 39,000 3,600 3,600 5,850 3,600 3,510Total CNY 80,000 $8,520 $9,750 $12,000 $11,700 $7,200Liabilities & Owners EquityAccts. Payable CNY21,000 $2,520 $3,150 $3,150 $1,890 $1,890Long-term debt 27,000 3,240 4,050 4,050 2,430 2,430 Stockholders equity 32,000 2,7602,550 4,800 7,380 2,880Total NT$ 80,000 $8,520 $9,750 $12,000 $11,700 $7,200Accounting exposure NT$ (7,000) 32,000 (7,000) 32,000Translation gain (loss) US$ (210) 960 210 (960)c. Students will quickly discover that each translation method has its advantages and disadvantages. After some discussion, the question of translation objectives will arise. Currency translation objectives are based on how foreign operations are viewed. If foreign operations are considered extensions of the parent, a case can be made for a historical rate method: current-noncurrent, monetary-nonmonetary, or temporal. If foreign operations are viewed from a local company perspective, a case can be made for the current rate method. Given the complexity of multinational business activities, one could argue that a single translation method will not serve all purposes for which translations are done. As long as the objectives of foreign currency translation differ among specific reporting entities, a practical solution is to insist on full disclosure of the translation procedures used so that users have a basis for reconciling any differences that exist. 9.Company A (Country A) (Reporting Currency = Apeso)Beginning of Year End of YearAssets: Exchange Rate Translated Exchange Rate TranslatedApeso 100 Apeso 100 Apeso 100Bol 100 Apeso 1 = Bol 1.25 Apeso 80 Apeso 1 = Bol 2 Apeso 50Apeso 180 Apeso 150Translat