Question

What are the acceptable methods of accounting for business operations in a foreign country? Choose a publicly traded company that operates internationally and identify impact that the foreign operations have on the financial statements. Explain.

Answer 1

Rule 11 of the International Accounting Standards Board provides for an accepted methodology for currency translation recording in case of companies having business operation in foreign countries. The rule provides two generally accepted methods:

1. Current Rate Translation Method: In this case, the functional currency and local currency are same. In this method, assets and liabilties use the current or spot rate existing on date of translation or date of balance sheet. Equity items excluding retained earnings use the transaction date's spot rate. Retained earnings and income statements use an average of the period’s translation rates, except when the foreign operation can identify an appropriate specific rate.

2. Temporal Rate Translation Method: This method is applied when local currency differs from the functional currency. In this case all income-generating assets on balance sheet and items on income statement are applied the temporal rate / historical exhcange rates from transaction dates. The difference adjustment is recorded as current earnings. According to FASB, this method is even applied in case of hyperinflationary environment

Lets take the instance of Walmart, who has operating business over 5 continents. In 2017, Walmart faced a negative impact of $11.0 billion or 2.3% of total revenues as a result of fluctuation in foreign currency exchange rates.The negative impact of foreign operations/foreign currency exhange rates offsetted the increase of 1.3% sales revenue and growth in US market.