38. (90 minutes) Remeasure the foreign currency transactions of a foreign
subsidiary into the subsidiary’s functional currency and then translate the
subsidiary’s trial balance into the parent’s reporting currency
a.
Remeasurement of BRL Trial Balance into Mexican Pesos MXN
BRL MXN
Debit Credit Rate Debit Credit
Cash 5,500 6.30 C 34,650
Accounts Receivable 28,000 6.30 C 176,400
Notes Payable 5,000 6.30 C 31,500
Remeasurement Gain 2,850
Total 251,350 251,350
Calculation of Remeasurement Gain
BRL Rate MXN
Net monetary asset balance, 1/1/15 0
Increase in net monetary items:
Income (sales less rent and interest) 28,500 6.20 A 176,700
Decrease in net monetary items:
Not applicable
38. (continued)
Calculation of Cumulative Translation Adjustment
MXN Rate USD
Net asset balance, 1/1/15 14,500,000 0.080 H 1,160,000.00
Increase in net assets:
Net assets, 12/31/15, at
current exchange rate 14,679,550 0.072 C 1,056,927.60
Translation adjustment, 2015 (debit) 120,538.65
Cumulative translation adjustment, 1/1/2015 (debit) Given 39,572.50
Cumulative translation adjustment, 12/31/2015 (debit) 160,111.15
Chapter 10 Develop Your Skills
Research Case 1—Foreign Currency Translation and Hedging Activities
The responses to this assignment will depend upon the company selected by the student for
analysis. It is unlikely that the company selected will disclose the amount of any
remeasurement gains and losses. The amount of translation adjustment reported in
negative translation adjustment indicates the opposite.
Research Case 2—Foreign Currency Translation Disclosures in the Computer Industry
The responses to requirements in this case will depend upon the annual
reports used by students to complete the case. The solution provided here
is based upon 2011 annual reports.
a. In 2011, in addition to providing information related to foreign currency
translation and hedging activities in its Form 10-K under 1A. Risk Factors,
p. 14, IBM also provided information in its Annual Report on these
activities in the following locations:
i. Management Discussion, under Currency Rate Fluctuations, p. 61.
In its Form 10-K for the year ended February 3, 2012 (Fiscal 2012), Dell
provided information related to foreign currency translation and hedging
activities in the following locations:
i. Item 1A. Risk Factors, p. 16, 17, 19.
Research Case 2 (continued)
b. IBM’s foreign operations do not have a predominant functional currency.
The company indicates that it operates in multiple functional currencies
(AR, p. 96). The majority of Dell’s foreign operations have the U.S. dollar
Dell’s foreign operations, on the other hand, are remeasured into dollars
using the temporal method with remeasurement gains and losses
c. From the Consolidated Statement of Comprehensive Income (AR, p. 71), it
can be seen that IBM reported translation adjustments as follows over the
period 2009-2011:
2009: positive $1,675 million
2010: positive $712 million
2011: negative $693 million
The negative sign of the translation adjustment in 2011 indicates that, on
average, the foreign currency functional currencies of IBM’s foreign
operations decreased in value against the U.S. dollar in that year. The
Dell reported foreign currency translation adjustments in Consolidated
Statements of Stockholders’ Equity as follows:
Fiscal 2010: negative $29 million
Fiscal 2011: positive $79 million
Fiscal 2012: negative $74 million
Research Case 2 (continued)
d. In Note D. Financial Instruments, under Foreign Exchange Risk, IBM
indicates that a significant portion of the company’s foreign currency
denominated debt is designated as a hedge of its foreign currency
e. The response to this requirement will vary from student to student. Much
Accounting Standards Case 1—More than One Functional Currency
This case requires students to search the authoritative literature to determine
how the functional currency should be determined for a foreign entity that
has more than one distinct and separable operation.
Source of guidance: FASB ASC 830-10-55-6 Foreign Currency Matters;
Overall; Implementation Guidance and Illustrations: The Functional Currency
ASC 830-10-55-6 states: “In some instances, a foreign entity might have more
than one distinct and separable operation. For example, a foreign entity might
have one operation that sells parent-entity-produced products and another
This guidance indicates that the functional currency should be determined
separately for each distinct and separable operation of a single foreign entity.
Accounting Standards Case 2—Change in Functional Currency
This case requires students to search the authoritative literature to determine
how an entity should handle a change in foreign currency from the foreign
currency to the U.S. dollar. Specific questions are:
Source of guidance: FASB ASC 830-10-45-10 Foreign Currency Matters;
General; Other Presentation Matters; Functional Currency Changes from
Foreign Currency to Reporting Currency
ASC 830-10-45-10 states: “If the functional currency changes from a foreign
currency to the reporting currency, translation adjustments for prior periods
In essence, the authoritative guidance indicates that the change in functional currency from the Canadian dollar to the U.S. dollar should
Excel Case—Translating Foreign Currency Financial Statements
a.b. Spreadsheet for the translation (current rate method) and remeasurement
(temporal method) of the FC financial statements of Charles Edward
Company’s foreign subsidiary.
Current Rate Method Temporal Method
December 31, 2015 FC Rate USD Rate USD
Sales 5,000 $0.45 A $2,250 $0.45 A $2,250
Cost of goods sold (3 ,000) $0.45 A (1 ,350) calculation (1 ,360)
Gross profit 2,000 subtotal 900 subtotal 890
Inventory 2,000 $0.38 C 760 $0.43 H 860
Fixed assets 6,000 $0.38 C 2,280 $0.50 H 3,000
Less: accum/deprec (600 ) $0.38 C (228 ) $0.50 H (300 )
Total assets 8 ,400 total 3 ,192 total 3 ,940
Current liabilities 1,500 $0.38 C 570 $0.38 C 570
Exchange Rates Temporal method—COGS (on a FIFO basis)
January 1-31, 2015 $0.50 BI 1,000 $0.50 H $500
Average 2015 $0.45 P 4,000 $0.43 H 1,720
Key:
Average Exchange Rate A
Current Exchange Rate C
Historical Exchange Rate H
Excel Case (continued)
*Computation of Translation Adjustment
FC USD
Net assets, 1/1/15 3,200 $0.50 1,600
Net income, 2015 700 $0.45 315
c. With the FC as functional currency, the U.S. dollar net income reflected in the
consolidated income statement is $315. If the U.S. dollar were the functional
currency, the amount would be twice as much—$630. The amount of total
Excel Case (continued)
FC Current Rate Temporal
Current ratio
CA 3,000 1,140 1,240
CL 1,500 570 570
2.0 2.0 2.1754
Debt to equity ratio
equity
1.15385 1.15385 0.76682
0.14 0.14 0.28
0.19718 0.20441 0.32898
3 3.55263 3.16279
These results show that the temporal method distorts all ratios as calculated
from the original foreign currency financial statements. The current rate
method maintains all ratios that use numbers in the numerator and
inventory turnover), even the current rate method creates distortions.
The U.S. dollar amounts reported under the temporal method for inventory
and fixed assets reflect the equivalent U.S. dollar cost of those assets as if
Excel Case (continued)
The U.S. dollar amounts reported under the current rate method for inventory
and fixed assets reflect neither the equivalent U.S. dollar cost of those
assets nor their U.S. dollar current value. By multiplying the FC historical
Excel and Analysis Case—Parker Inc. and Suffolk PLC
This assignment requires translation of foreign currency financial
statements under three different sets of assumptions regarding changes in
Part I—Appreciating Foreign Currency
Relevant exchange rates: January 1, 2014 $1.60
2014 Average $1.62