Question

discuss whether the reported currency effects resulting from the translation process matter.

Answer 1

Currency Translation :

Currency translation is the process of converting the financial results of a parent company's foreign subsidiaries into its functional currency, the primary economic environment in which an entity generates and expends cash. For transparency purposes, companies with overseas ventures are, when applicable, required to report their accounting figures in one currency.

How Currency Translation Works

Many companies, particularly big ones, are multinational, operating in various regions of the world that use different currencies. If a company sells into a foreign market and then sends payments back home, earnings must be reported in the currency where its corporate headquarters is based. Alternatively, in the rare case that a company has a foreign subsidiary, say in Brazil, that does not transfer funds back to the parent company, the functional currency for that subsidiary would be the Brazilian real.

Before a foreign entity's financial statements can translate into the reporting currency, the foreign unit's financial statements must be prepared in accordance with General Accepted Accounting Principles (GAAP) rules.

Elements

• Currency translation is the process of converting the financial results of a parent company's foreign subsidiaries into its functional currency.
• Companies must report using the currency of the environment in which it primarily generates and expends cash.
• Currency translations use the exchange rate at the end of the reported period for assets and liabilities, the exchange rate on the date that income or an expense was recognized for the income statement and a historical exchange rate at the date of entry to shareholder equity.
• Gains and losses resulting from currency conversions are recorded in a company's consolidated statements of shareholders' equity.

Example of Currency Translation

International sales accounted for 62 percent of Apple Inc.’s (AAPL) revenue in the quarter ending Dec. 29, 2018. In 2018, a recurring theme for the iPhone maker and other big multinationals has been the adverse impact of a rising US dollar. When the greenback strengthens against other currencies it subsequently weighs on international financial figures once they are converted into US dollars.

The likes of Apple seek to overcome adverse fluctuations in foreign exchange rates by hedging their exposure to currencies. Foreign exchange derivatives, such as forward contracts, futures contracts, and options, are acquired to enable companies to lock in a currency rate and ensure that it remains the same over a specified period of time.

Constant currencies is another term that often crops up in financial statements. Companies with overseas operations often choose to publish reported numbers alongside figures that strip out the effects of exchange rate fluctuations. Investors generally pay a lot of attention to constant currency figures as they recognize that currency fluctuations can mask the true financial performance of a company.

In its fiscal 2019 third-quarter ending Feb. 28, 2019, Nike Inc. (NKE) reported a 7 percent increase in revenues, adding that sales rose 11 percent on a constant currency basis.