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	824,000
Inventory		1,324,000
Property, plant & equipment		4,000,000
Notes payable		(2,148,000	)

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

SOLUTION:

Calculation of Net Asset:

Particulars	CHF
Cash	824,000
Inventory	1,324,000
Property, plant & equipment	4,000,000
Notes payable	(2,148,000)
NET ASSET	4,000,000

Translation adjustment

Translation	CHF	Exchange Rate	US $
Begining Net Asset	4,000,000	1.00	4,000,000
Ending Net Asset at current rate	4,000,000	1.10	4,400,000
Translation adjustment (positive)			400,000

The translation adjustment increases stockholders' equity by $400,000.

This is positive because the Swiss subsidiary has a net asset position of CHF 4,000,000 and the Swiss franc appreciates by $0.10. The positive translation adjustment is not made in terms of dollar cash flow. It would only be a profit if Stephanie sold this operation for exactly CHF4,000,000 on December 31 and converted the sales proceeds into dollars at the current exchange rate of $1.10 per Swiss franc.

Remeasurement loss

Remeasurement	CHF	Exchange rate	US $
Beginning net liabilities	(1324,000) (824,000-2148,000)	1.00	(1,324,000)
Ending net liabilities at current exchange rate	(1324000)	1.10	(1,456,400)
Remeasurement loss			(132,400)

The remeasurement loss arises since Swiss subsidiary has a net monetary liability position of CHF 1,324,000. The Swiss franc has appreciated by $0.10 [CHF13,24,000 x $0.10 = $132,400]. The loss is unrealized.

It would be realized only if the Swiss subsidiary converted its Swiss franc cash into dollars at December 31, thereby realizing a transaction gain of $82,400 [CHF824,000 x ($1.10 - $1.00)], and the parent paid off the Swiss franc note payable using U.S. dollars, thereby realizing a transaction loss of $214,800 [CHF2,148,000 x ($1.10 - $1.00)].