Question

***This is an Internatiinal Finance course***

Examine the re-measurement and translation process.

Answer 1

There are two methods for converting foreign subsidiary’s financial statement while consolidating financial statements-

1. Translation

2. Remeasurement

Translation-

If the functional currency is same as the the local currency of the foreign entity, the foreign financial statements are translated into the parents currency using the current rate method. Thus the method is also called the current rate method. In this method most items in the financial statements are translated at the current exchange rate.

When converting foreign currencies to the company's presentation currency-

• The assets and liabilities listed on the balance sheet are converted to the presentation currency using the spot exchange rate as of the date on the balance sheet

• Stock and retained earnings are translated at their historical rates

• Income statement items are translated at the weighted average rate for the accounting period.

Remeasurement-

If the functional currency is same as the parents currency, the foreign financial statements are remeasured into parent’s currency using temporal method. In the temporal method values on the books of a foreign entity are converted into the parent company's currency using the exchange rates at the time assets and liabilities are acquired.

• Monetary assets such as accounts receivable, investments, and cash are converted to the parent's currency at the exchange rate in effect on the balance sheet date

• Non-monetary assets are longer term assets, such as property, plant, and equipment, and are converted using the exchange rate in effect on the date the asset was obtained

• All foreign exchange gains and losses are reported in net earnings of the parent company. This can increase the volatility of the parent company's earnings.

Example

ABC Corp., a US company has a wholly owned subsidiary, XYZ Corp. that operates in UK. The various possibilities are listed as below-

Local Currency- GBP

Presentation Currency/ Parent Currency- USD