Question

On December 18, 2020, Stephanie Corporation acquired 100 percent of a Swiss company for 4.023 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, 2020, the book and fair values of the subsidiary’s assets and liabilities were as follows:

Cash	CHF	823,000
Inventory		1,323,000
Property, plant, and equipment		4,023,000
Notes payable		(2,146,000	)

Stephanie prepares consolidated financial statements on December 31, 2020. 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, 2020, 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 2020 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:

A. TRANSLATION ADJUSTMENT:

Translation adjustment

Particulars	CHF	Exchange rate	US$
Beginning net assets 12/18	4,023,000 (823,000 + 1,323,000 + 4,023,000 – 2,146,000)	1.00	4,023,000
Ending net assets 31/12 at current exchange rate	4,023,000	1.10	4,425,300
Translation adjustment (positive)			(402,300)

The translation adjustment increases stockholders' equity by $ 402,300.

- This is positive because the Swiss subsidiary has a net asset position of CHF 4,023,000 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 CHF 4,023,000 on December 31 and converted the sales proceeds into dollars at the current exchange rate of $1.10 per Swiss franc.

B. REMEASUREMENT LOSS:

Remeasurement loss

Particulars	CHF	Exchange rate	US$
Beginning net liabilities 12/18	(1,323,000) (823,000 – 2,146,000)	1.00	(1,323,000)
Ending net liabilities 31/12 at current exchange rate	(1,323,000)	1.10	(1,455,300)
Remeasurement loss			(132,300)

The remeasurement loss arises since Swiss subsidiary has a net monetary liability position of CHF 1,323,000.

The Swiss franc has appreciated by $0.10 [CHF1,323,000 x $0.10 = $132,300]. 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 $82,300 [CHF823,000 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 $214,600 [CHF2,146,000 x ($1.10 - $1.00)].