Question

1.  XYZ Company, a manufacturer of computer peripheries, assembles a particular product line at a wholly owned facility in Singapore. The product is designed at XYZ’s headquarters in the United States, but the different components used in the assembly process are manufactured throughout Asia and shipped to Singapore for final assembly. Some of the components are manufactured in multiple locations, so the customer can actually designate where XYZ should source the components. The final product is assembled in Singapore and then shipped via Emery Freight to customers throughout Asia. XYZ Singapore does not buy any components from the United States, but it invoices all of the components purchased from Asian suppliers in U.S. dollars. In addition, it sells the product to Asian customers in U.S. dollars. However, all of its expenses in Singapore are paid in Singapore dollars. Most of the key marketing decisions are made by the U.S. marketing staff, although the Singapore staff acts as a liaison with Emery Freight personnel and deals with the local workers, most of whom come from Sri Lanka on short-term work visas.

     XYZ prefers to translate the results of their Singapore subsidiary into dollars using the current rate method. What is the advantage to XYZ of using the current rate method? As their auditor, what do you think of their decision? If their decision is wrong and they should be using the temporal method, is it possible for them to change?

Answer 1

The current rate method is a method of foreign currency translation where most items in the financial statements are translated at the current exchange rate.

If the XYZ using the current rate method, the biggest advantage is that the gain or loss  on translation does not pass through the income statement but goes directly to a reserve account (reducing variability of reported earnings).

As their auditor ,I think its a good decision because the current rate method is utilized in instances where the subsidiary isn't well integrated with the parent company and the local currency where the subsidiary operates is the same as it's functional currency. It helps to reduce the volatility of consolidated earnings.it is also helpful for management, shareholders and creditors in evaluating a company because losses and gains resulting from the currency translations are excluded from the accounting of consolidated earnings.

Yes if their decision is wrong and they should be using the temporal method it is possible to change them.