Question

On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2017, the book and fair values of the subsidiary’s assets and liabilities were:

Cash	CHF	820,000
Inventory		1,320,000
Property, plant & equipment		4,020,000
Notes payable		(2,140,000	)

Stephanie prepares consolidated financial statements on December 31, 2017. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation.

1. Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment?

2. Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

Answer 1

Ques 1
translation asjutment	$            402,000
remeasurement loss	$            132,000
		Translation		Remasurement
	CHF	rate	US$	rate	US$
cash	820,000	$              1.10	$            902,000	$       1.10	$            902,000
inventory	1,320,000	$              1.10	$        1,452,000	$       1.00	$        1,320,000
Fixed assets	4,020,000	$              1.10	$        4,422,000	$       1.00	$        4,020,000
total assets	6,160,000		$        6,776,000		$        6,242,000
notes payable	2,140,000	$              1.10	$        2,354,000	$       1.10	$        2,354,000
Owners equity	4,020,000	$              1.00	$        4,020,000	$       1.00	$        4,020,000
Translation adjustment			$            402,000
retained earnings					$         (132,000)
(re-measurement loss)
total	6,160,000		6,776,000		6,242,000
Economic Relevance of Translation adjustment The translation adjustment increases equity by $402,000. This is due to the positive translation adjustment which arise due to the appreciation of Swiss Franc by net $0.10 and the asset position of $4,020,000. The proceeds can only be realized if Stephanie sold this operation on Dec 31 and converted the proceeds into dollars at current exchange rate of 1.10 per swiss franc. Economic Relevance of Re-measurement Loss The re-measurement loss arises due to the net monetary liability position of CHF 1,320,000 and that swiss franc appreciated by $.10 which made the total loss of $132,000. But the fact is that the total loss remains unrealized because only if the position is sold, then swiss subsidiary converted its Swiss franc cash into dollars at 31 Dec. But then there would be a net gain of $1.10 - $1.00 = .10 * CHF 820,000 i.e. $82,000 and the parent paid off the Note payable by using the US Dollars thereafter realizing a transaction loss of $214,000.