Question

one of the alleged advantages of using the current rate method to translate a subsidiary's financial statements is the fact that it preserves the "flavor" of the subsidiary's local currency financial statements. What's does this mean? Please explain.

Answer 1

In current rate method all aasets and liabilites are shown at current rate. Current rate method are used for Self-sustaining foreign entities .

A self-sustaining foreign subsidiary is an entity that operates in the local economy more or less independently of its parent. To a large degree its operations, including purchasing, production, and sales, are tied into the local economy; and the entity could probably operate on its own without foreign parent ownership. An example would be the operations of Shell Petroleum in the United States; although owned by a Dutch-British parent, the U.S. operations of Shell in refining and transporting stand pretty much on their own. (Most of Shell’s petroleum stations in the United States are owned by local operators.

Therefore, if an entity is using current rate method then it is an self sustaining foreign subsidiary and its statements are updated to keep it in line with current rate of susidiary local currency. Hence, it helps in preserving the flovor of the subsidiarys local currency financial statements.

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