Chapter 08 – Translation of Foreign Currency Financial Statements
Answers to Questions
1. The two major issues related to the translation of foreign currency financial statements are:
2. Balance sheet exposure arises when a foreign currency balance is translated at the current
3. The major concept underlying the current rate method is that the entire foreign investment
is exposed to foreign exchange risk. Therefore all assets and liabilities are translated at
the current exchange rate. Balance sheet exposure under this concept is equal to the net
investment.
4. The major differences relate to non-monetary assets carried at historical cost and related
5. To determine the appropriate translation method under both IFRS and U.S. GAAP, the
functional currency of a foreign subsidiary must be identified. The functional currency is
6. For foreign entities that report in the currency of a hyperinflationary economy, IAS 21
requires the parent first to restate the foreign financial statements for inflation using IAS 29
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Chapter 08 – Translation of Foreign Currency Financial Statements
7. The functional currency is the currency of the subsidiary’s primary economic environment.
It is usually identified as the currency in which the company generates and expends cash.
U.S. GAAP stipulates that several factors such as the location of primary sales markets,
sources of materials and labor, the source of financing, and the amount of intercompany
8. U.S. GAAP requires use of the temporal method for operations in highly inflationary
countries. Use of the current rate method without first restating for inflation results in a
9. Although balance sheet exposure does not result in cash inflows and outflows, it does
nevertheless affect amounts reported in consolidated financial statements. If the foreign
10. The gains and losses arising from financial instruments used to hedge balance sheet
exposure are treated in a similar manner as the item the hedge is intended to cover. If the
Solutions to Exercises and Problems
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Chapter 08 – Translation of Foreign Currency Financial Statements
9. Armetis Corporation
a. Current Rate Method
Exchange
BRL Rate CAD
b. Temporal Method
Exchange
BRL Rate CAD
10. Simga Company
a. Highly inflationary economy (Temporal method)
Exchange
Equipment TL Rate USD
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Chapter 08 – Translation of Foreign Currency Financial Statements
Determination of Accumulated Depreciation at 12/31/Y4
Useful Life Annual Age Accumulated
Cost in years Depreciation in years Depreciation
6,000,000,00
24,000,000,00
Accumulated Exchange
Depreciation TL Rate USD
Book value of equipment, 12/31/Y4 (in
USD)
b. Non-highly inflationary economy (Current rate method)
Exchange
Equipment TL Rate USD
Accumulated Exchange
Depreciation TL Rate USD
Book value of equipment, 12/31/Y4 (in
USD)
Cost 60,000
11. Alliance Corporation
Exchange
Marks Rate A$
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Chapter 08 – Translation of Foreign Currency Financial Statements
12. Zesto Company
Pesos US$
13. Alexander Corporation
a. Swiss franc is functional currency (Current rate method)
Swiss Exchange U.S.
Francs Rate Dollars
b. U.S. dollar is functional currency (Temporal method)
Swiss Exchange U.S.
Francs Rate Dollars
Economic Relevance of Translation Adjustment
The translation adjustment increases stockholders’ equity by $410,000. The positive
translation adjustment arises because the Swiss subsidiary has a net asset position
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Chapter 08 – Translation of Foreign Currency Financial Statements
Economic Relevance of Remeasurement Loss
14. Gramado Company
Exchange Rates $/Cz
Exchange
Cz Rate $
388,80
14. (continued)
Exchange
Cz Rate $
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Chapter 08 – Translation of Foreign Currency Financial Statements
Exchange
Cz Rate $
15. Brookhurst Company
Exchange Rates USD/ZAR
a. South African rand is functional currency (Current rate method)
Exchange
ZAR Rate USD
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Chapter 08 – Translation of Foreign Currency Financial Statements
15. (continued)
Calculation of cumulative translation adjustment
Exchange
ZAR Rate USD
Translation adjustment, Year 1 (positive) (7,140)
15. (continued)
b. U.S. dollar is functional currency (Temporal method)
Exchange
ZAR Rate USD
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Chapter 08 – Translation of Foreign Currency Financial Statements
15. (continued)
Schedule A. Exchange
Calculation of cost of goods sold ZAR Rate USD
Beginning inventory – –
Calculation of remeasurement gain
(loss)
Exchange
ZAR Rate USD
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Chapter 08 – Translation of Foreign Currency Financial Statements
16. The solutions to this problem will depend upon the U.S.-based MNC selected by each
17. This problem requires students to examine disclosures made by ExxonMobil and
(a) In its 2012 Form 10-K, ExxonMobil disclosed the following in its Summary of Accounting
Policies: “The Corporation selects the functional reporting currency for its international
subsidiaries based on the currency of the primary economic environment in which each
(b) In 2012, ExxonMobil reported translation adjustments (in other comprehensive income) of
(c) In 2012, neither company mentioned hedges of net investment in foreign operations.
ExxonMobil indicated that it makes limited use of derivatives, with no further description.
Case 8-1 Columbia Corporation
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Chapter 08 – Translation of Foreign Currency Financial Statements
Part I
Exchange Rates $/PLN
January 1, Year 1 0.25
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