InternationalAccounting,6/eFrederickD.S.ChoiGaryK.MeekChapter6:ForeignCurrencyTranslationChoi/Meek,6/e1InternationalAccounting,6/eFLearningObjectivesWhydofirmstranslatefromonecurrencytoanother?Whatisthedifferencebetweenaspot,forward,andswaptransaction?Whatexchangeratesareusedinthecurrencytranslationprocessandwhataretheirfinancialstatementeffects?Choi/Meek,6/e2LearningObjectivesWhydofirHowdoesatranslationgainorlossdifferfromatransactionsgainorloss?Istheremorethanonewayoftranslatingfinancialstatementsfromonecurrencytoanother?Ifso,whatarethey?Howdoesthetemporalmethodofcurrencytranslationdifferfromthecurrentratemethod?Whatistherelationshipbetweencurrencytranslationandinflation?Choi/Meek,6/e3HowdoesatranslationgainorWhydoFirmsTranslate?Facilitatesthepreparationofconsolidatedfinancialstatementsthatallowreaderstoseetheperformanceofamultinationalcompany’stotaloperationsbothdomesticandforeign.Facilitatesthemeasurementofafirm’sexposuretoforeignexchangerisk.Choi/Meek,6/e4WhydoFirmsTranslate?FacilitFacilitatestherecordingofforeigncurrencytransactions;i.e.,foreigncurrencysales,purchases,borrowingorlendingintheconsolidatedentity’sreportingcurrency.Facilitatesreportingdomesticaccountstoforeignaudiences-of-interest.Choi/Meek,6/e5FacilitatestherecordingoffTypesofTransactionRatesSpottransactions:thephysicalexchangeofonecurrencyforanotherinwhichdeliverytakesplaceimmediately.Directquote:theexchangeratespecifiesthenumberofdomesticcurrencyunitsneededtoacquireaunitofforeigncurrency.Indirectquote:theexchangeratespecifiesthepriceofaunitofthedomesticcurrencyintermsoftheforeigncurrency.Choi/Meek,6/e6TypesofTransactionRatesSpotForwardtransaction:agreementstoexchangeaspecifiedamountofonecurrencyforanotheratafuturedate.Swaptransaction:involvesthesimultaneousspotpurchaseandforwardsale,orspotsaleandforwardpurchaseofacurrency.Choi/Meek,6/e7Forwardtransaction:agreementAccounting

forSpotTransactionsSpottransaction:occurswhenanenterprisepurchasesorsellsgoodsforwhichpaymentismadeinaforeigncurrency,orwhenitborrowsorlendsforeigncurrency.Atthetransactiondate,eachasset,liability,revenue,andexpensedenominatedinaforeigncurrencyismeasuredandrecordedinthefunctionalcurrencyofthereportingentityatthespotexchangerateineffectonthatdate.Choi/Meek,6/e8Accounting

forSpotTransactiFunctionalcurrencyistheprimarycurrencyinwhichthereportingentitytransactsbusinessandgeneratesandspendscash;e.g.,dollarsinthecaseofaU.S.reportingentity.Ateachbalancesheetdate,recordedbalancesdenominatedinacurrencyotherthanthefunctionalcurrencyofthereportingentityisadjustedtoreflectthecurrentexchangerate.Choi/Meek,6/e9FunctionalcurrencyistheAccountingforSpotTransactions(contin)Aforeignexchangegainorlossisrecordedwhenevertheexchangeratechangesbetweentheoriginaltransactiondateandthesettlementdate,orbetweentheoriginaltransactiondateandthefinancialstatementdateshouldfinancialstatementsbepreparedpriortosettlement.

Choi/Meek,6/e10AccountingforSpotTransactioExample:OnSeptember1,acalendaryearU.S.manufacturersells,on90-daycredit,goodstoaSwedishimporterforSEK1,000,000.Thedollar/kronaexchangerateis$0.14=SEK1onSeptember1,$0.13=SEK1onSeptember30,and$0.11=SEK1onDecember1.Choi/Meek,6/e11Example:OnSeptember1,aChoi/Meek,6/e12Choi/Meek,6/e12TypesofTranslationRatesandtheirStatementEffectsHistoricalrate:theexchangerateprevailingwhenaforeigncurrencyassetwasfirstacquiredoraforeigncurrencyliabilityfirstincurred.Preservestheoriginalcostequivalentofaforeigncurrencyiteminthereportingcurrency.Useofhistoricalratesdonotgiverisetotranslationgainsorlosses,whichareincreasesordecreasesinthereportingcurrencyequivalentoftheforeigncurrency.Choi/Meek,6/e13TypesofTranslationRatesandCurrentrate:theexchangerateprevailingasofthefinancialstatementdate.Changesthereportingcurrencyequivalentofaforeigncurrencyitemwheneverexchangerateschange.Useofthecurrentrategivesrisetotranslationgainsandlosses.Averagerate:asimpleorweightedaverageofeitherhistoricalorcurrentexchangerates.

Choi/Meek,6/e14Currentrate:theexchangeratTranslationvs.TransactionGainsorLossesTranslationgainsorlosses:resultfromarestatementprocess.Transactionsgainsorlosses:resultfromthephysicalexchangeofonecurrencyforanother.Choi/Meek,6/e15Translationvs.TransactionGaGainorlossonasettledtransaction:ariseswhenevertheexchangerateusedtobooktheoriginaltransactiondiffersfromtheexchangerateusedatsettlement.Gainorlossonanunsettledtransaction:ariseswheneverconsolidatedfinancialstatementsarepreparedbeforesettlementandthecurrentratehaschangedsincethetransactiondate.Issimilartoatranslationgainorlossasitresultsfromarestatementprocess.Choi/Meek,6/e16GainorlossonasettledtranChoi/Meek,6/e17Choi/Meek,6/e17TypesofTranslationMethodsSingleratemethod:appliesasingleexchangerate,thecurrentrate,toallforeigncurrencyassetsandliabilities.Multipleratemethods:Usesomecombinationorcurrentandhistoricalratestotranslateforeigncurrencybalances.Choi/Meek,6/e18TypesofTranslationMethodsSChoi/Meek,6/e19Choi/Meek,6/e19Current-NoncurrentMethodCurrentassetsandcurrentliabilitiestranslatedatthecurrentrate.Noncurrentassetsandliabilitiestranslatedatthehistoricalrate.Revenuesandexpenses(excludingdepreciationandamortization)translatedataveragerates.Depreciationandamortizationchargesathistoricalratesineffectwhenrelatedassetsareacquired.

Choi/Meek,6/e20Current-NoncurrentMethodCurreChoi/Meek,6/e21Choi/Meek,6/e21Choi/Meek,6/e22Choi/Meek,6/e22Monetary-NonmonetaryMethodMonetaryassetsandliabilitiestranslatedatcurrentrates.Nonmonetaryassetsandliabilitiestranslatedathistoricalrates.Choi/Meek,6/e23Monetary-NonmonetaryMethodMoRevenuesandexpenses,excludingdepreciation,amortizationandcostofsales,ataveragerates.Depreciation,amortizationcharges,andcostofsalesathistoricalratesineffectwhenrelatedassetsareacquired.SeeExhibits6-8and6-9.Choi/Meek,6/e24Revenuesandexpenses,excludiTemporalMethodMonetaryassetsandliabilitiestranslatedatthecurrentrate.Nonmonetaryitemstranslatedatratesthatpreservetheiroriginalmeasurementbases.Foreigncurrencybalancesathistoricalcostaretranslatedathistoricalrates.Foreigncurrencybalancesatcurrentcostormarketvaluearetranslatedatthecurrentrate.Choi/Meek,6/e25TemporalMethodMonetaryassetsRevenuesandexpenses,includingcostofsalesifinventoriesarecarriedatmarket,ataveragerates.Depreciation,amortizationcharges,andcostofsaleswheninventoriesarecarriedatcost,athistoricalratesineffectwhenrelatedassetsareacquired.SeeExhibits6-8and6-9.Choi/Meek,6/e26Revenuesandexpenses,includiCurrent(Single)RateMethodAllforeignassetsandliabilitiestranslatedatthecurrentrate.Allrevenuesandexpensesaretranslatedbyanappropriatelyweightedaverageofcurrentexchangeratesfortheperiod.SeeExhibits6-8and6-9.Choi/Meek,6/e27Current(Single)RateMethodAlFeaturesofFASB52andIAS21ObjectivesReflectinconsolidatedstatementsthefinancialresultsandrelationshipsmeasuredintheprimarycurrencyinwhicheachconsolidatedentitydoesbusiness.Provideinformationcompatiblewiththeexpectedeconomiceffectsofanexchangeratechangeonanentity’scashflowsandequity.Choi/Meek,6/e28FeaturesofFASB52andIAS21Objectivesbasedonthenotionofafunctionalcurrencydefinedearlier.Functionalcurrencycanbetheparentcurrency.Functionalcurrencycanbethelocalcurrency.Choi/Meek,6/e29ObjectivesbasedonthenotionChoi/Meek,6/e30Choi/Meek,6/e30FeaturesofFASB52andIAS21(contin)Translationwhentheparentcurrencyisfunctional.Foreigncurrencyfinancialstatementsremeasuredtoreportingcurrencyusingthetemporalmethod.Translationgainsandlossesresultingfromthetranslationprocessareincludedincurrentincome.Choi/Meek,6/e31FeaturesofFASB52andIAS21Translationwhenthelocalcurrencyisfunctional.Foreigncurrencyfinancialstatementstranslatedtoreportingcurrencyusingthecurrentratemethod.Translationgainsandlossesdisclosedasaseparatecomponentofconsolidatedequity.Choi/Meek,6/e32TranslationwhenthelocalcurRelationshipBetweenForeignCurrencyTranslationandInflationTheexternalvalueofacountry’scurrencyisinverselyrelatedtoitsrateofinflation.IAS21permitsrestatementforlocalinflationpriortocurrencytranslation.Choi/Meek,6/e33RelationshipBetweenForeignCFAS52requiresuseoftheparentcurrencyasthefunctionalcurrencyforforeignoperationslocatedinhyperinflationaryenvironments(i.e.,countrieswherethecumulativerateofinflationexceeds100%overathree-yearperiod).Choi/Meek,6/e34FAS52requiresuseoftheparChoi/Meek,6/e35Choi/Meek,6/e35Choi/Meek,6/e36Choi/Meek,6/e36Choi/Meek,6/e37Choi/Meek,6/e37Choi/Meek,6/e38Choi/Meek,6/e38Choi/Meek,6/e39Choi/Meek,6/e39Choi/Meek,6/e40Choi/Meek,6/e40OtherChapterExhibits(contin)Choi/Meek,6/e41OtherChapterExhibits(continInternationalAccounting,6/eFrederickD.S.ChoiGaryK.MeekChapter6:ForeignCurrencyTranslationChoi/Meek,6/e42InternationalAccounting,6/eFLearningObjectivesWhydofirmstranslatefromonecurrencytoanother?Whatisthedifferencebetweenaspot,forward,andswaptransaction?Whatexchangeratesareusedinthecurrencytranslationprocessandwhataretheirfinancialstatementeffects?Choi/Meek,6/e43LearningObjectivesWhydofirHowdoesatranslationgainorlossdifferfromatransactionsgainorloss?Istheremorethanonewayoftranslatingfinancialstatementsfromonecurrencytoanother?Ifso,whatarethey?Howdoesthetemporalmethodofcurrencytranslationdifferfromthecurrentratemethod?Whatistherelationshipbetweencurrencytranslationandinflation?Choi/Meek,6/e44HowdoesatranslationgainorWhydoFirmsTranslate?Facilitatesthepreparationofconsolidatedfinancialstatementsthatallowreaderstoseetheperformanceofamultinationalcompany’stotaloperationsbothdomesticandforeign.Facilitatesthemeasurementofafirm’sexposuretoforeignexchangerisk.Choi/Meek,6/e45WhydoFirmsTranslate?FacilitFacilitatestherecordingofforeigncurrencytransactions;i.e.,foreigncurrencysales,purchases,borrowingorlendingintheconsolidatedentity’sreportingcurrency.Facilitatesreportingdomesticaccountstoforeignaudiences-of-interest.Choi/Meek,6/e46FacilitatestherecordingoffTypesofTransactionRatesSpottransactions:thephysicalexchangeofonecurrencyforanotherinwhichdeliverytakesplaceimmediately.Directquote:theexchangeratespecifiesthenumberofdomesticcurrencyunitsneededtoacquireaunitofforeigncurrency.Indirectquote:theexchangeratespecifiesthepriceofaunitofthedomesticcurrencyintermsoftheforeigncurrency.Choi/Meek,6/e47TypesofTransactionRatesSpotForwardtransaction:agreementstoexchangeaspecifiedamountofonecurrencyforanotheratafuturedate.Swaptransaction:involvesthesimultaneousspotpurchaseandforwardsale,orspotsaleandforwardpurchaseofacurrency.Choi/Meek,6/e48Forwardtransaction:agreementAccounting

forSpotTransactionsSpottransaction:occurswhenanenterprisepurchasesorsellsgoodsforwhichpaymentismadeinaforeigncurrency,orwhenitborrowsorlendsforeigncurrency.Atthetransactiondate,eachasset,liability,revenue,andexpensedenominatedinaforeigncurrencyismeasuredandrecordedinthefunctionalcurrencyofthereportingentityatthespotexchangerateineffectonthatdate.Choi/Meek,6/e49Accounting

forSpotTransactiFunctionalcurrencyistheprimarycurrencyinwhichthereportingentitytransactsbusinessandgeneratesandspendscash;e.g.,dollarsinthecaseofaU.S.reportingentity.Ateachbalancesheetdate,recordedbalancesdenominatedinacurrencyotherthanthefunctionalcurrencyofthereportingentityisadjustedtoreflectthecurrentexchangerate.Choi/Meek,6/e50FunctionalcurrencyistheAccountingforSpotTransactions(contin)Aforeignexchangegainorlossisrecordedwhenevertheexchangeratechangesbetweentheoriginaltransactiondateandthesettlementdate,orbetweentheoriginaltransactiondateandthefinancialstatementdateshouldfinancialstatementsbepreparedpriortosettlement.

Choi/Meek,6/e51AccountingforSpotTransactioExample:OnSeptember1,acalendaryearU.S.manufacturersells,on90-daycredit,goodstoaSwedishimporterforSEK1,000,000.Thedollar/kronaexchangerateis$0.14=SEK1onSeptember1,$0.13=SEK1onSeptember30,and$0.11=SEK1onDecember1.Choi/Meek,6/e52Example:OnSeptember1,aChoi/Meek,6/e53Choi/Meek,6/e12TypesofTranslationRatesandtheirStatementEffectsHistoricalrate:theexchangerateprevailingwhenaforeigncurrencyassetwasfirstacquiredoraforeigncurrencyliabilityfirstincurred.Preservestheoriginalcostequivalentofaforeigncurrencyiteminthereportingcurrency.Useofhistoricalratesdonotgiverisetotranslationgainsorlosses,whichareincreasesordecreasesinthereportingcurrencyequivalentoftheforeigncurrency.Choi/Meek,6/e54TypesofTranslationRatesandCurrentrate:theexchangerateprevailingasofthefinancialstatementdate.Changesthereportingcurrencyequivalentofaforeigncurrencyitemwheneverexchangerateschange.Useofthecurrentrategivesrisetotranslationgainsandlosses.Averagerate:asimpleorweightedaverageofeitherhistoricalorcurrentexchangerates.

Choi/Meek,6/e55Currentrate:theexchangeratTranslationvs.TransactionGainsorLossesTranslationgainsorlosses:resultfromarestatementprocess.Transactionsgainsorlosses:resultfromthephysicalexchangeofonecurrencyforanother.Choi/Meek,6/e56Translationvs.TransactionGaGainorlossonasettledtransaction:ariseswhenevertheexchangerateusedtobooktheoriginaltransactiondiffersfromtheexchangerateusedatsettlement.Gainorlossonanunsettledtransaction:ariseswheneverconsolidatedfinancialstatementsarepreparedbeforesettlementandthecurrentratehaschangedsincethetransactiondate.Issimilartoatranslationgainorlossasitresultsfromarestatementprocess.Choi/Meek,6/e57GainorlossonasettledtranChoi/Meek,6/e58Choi/Meek,6/e17TypesofTranslationMethodsSingleratemethod:appliesasingleexchangerate,thecurrentrate,toallforeigncurrencyassetsandliabilities.Multipleratemethods:Usesomecombinationorcurrentandhistoricalratestotranslateforeigncurrencybalances.Choi/Meek,6/e59TypesofTranslationMethodsSChoi/Meek,6/e60Choi/Meek,6/e19Current-NoncurrentMethodCurrentassetsandcurrentliabilitiestranslatedatthecurrentrate.Noncurrentassetsandliabilitiestranslatedatthehistoricalrate.Revenuesandexpenses(excludingdepreciationandamortization)translatedataveragerates.Depreciationandamortizationchargesathistoricalratesineffectwhenrelatedassetsareacquired.

Choi/Meek,6/e61Current-NoncurrentMethodCurreChoi/Meek,6/e62Choi/Meek,6/e21Choi/Meek,6/e63Choi/Meek,6/e22Monetary-NonmonetaryMethodMonetaryassetsandliabilitiestranslatedatcurrentrates.Nonmonetaryassetsandliabilitiestranslatedathistoricalrates.Choi/Meek,6/e64Monetary-NonmonetaryMethodMoRevenuesandexpenses,excludingdepreciation,amortizationandcostofsales,ataveragerates.Depreciation,amortizationcharges,andcostofsalesathistoricalratesineffectwhenrelatedassetsareacquired.SeeExhibits6-8and6-9.Choi/Meek,6/e65Revenuesandexpenses,excludiTemporalMethodMonetaryassetsandliabilitiestranslatedatthecurrentrate.Nonmonetaryitemstranslatedatratesthatpreservetheiroriginalmeasurementbases.Foreigncurrencybalancesathistoricalcostaretranslatedathistoricalrates.Foreigncurrencybalancesatcurrentcostormarketvaluearetranslatedatthecurrentrate.Choi/Meek,6/e66TemporalMethodMonetaryassetsRevenuesandexpenses,includingcostofsalesifinventoriesarecarriedatmarket,ataveragerates.Depreciation,amortizationcharges,andcostofsaleswheninventoriesarecarriedatcost,athistoricalratesineffectwhenrelatedassetsareacquired.SeeExhibits6-8and6-9.Choi/Meek,6/e67Revenuesandexpenses,includiCurrent(Single)RateMethodAllforeignassetsandliabilitiestranslatedatthecurrentrate.Allrevenuesandexpensesaretranslatedbyanappropriatelyweightedaverageofcurrentexchangeratesfortheperiod.SeeExhibits6-8and6-9.Choi/Meek,6/e68Current(Single)RateMethodAlFeaturesofFASB52andIAS21ObjectivesReflectinconsolidatedstatementsthefinancialresultsandrelationshipsm