Chapter Fourteen Management of Translation Exposure 14 Chapter objective This chapter discusses the impact that unanticipated changes in exchange rates may have on the consolidated financial statements of the multinational company
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 14 Chapter Fourteen Management of Translation Exposure Chapter Objective: This chapter discusses the impact that unanticipated changes in exchange rates may have on the consolidated financial statements of the multinational company
Chapter Outline ● Translation Methods ● FASB Statement8 fASb Statement 52 o Management of Translation Exposure Empirical analysis of the Change from FASB 8 to FASB 52 McGraw-Hilylrwoin 14-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-1 Chapter Outline ⚫ Translation Methods ⚫ FASB Statement 8 ⚫ FASB Statement 52 ⚫ Management of Translation Exposure ⚫ Empirical Analysis of the Change from FASB 8 to FASB 52
Translation methods o Current/noncurrent method Monetary/Nonmonetary Method emporal method ● Current rate method McGraw-Hilylrwoin 14-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-2 Translation Methods ⚫ Current/Noncurrent Method ⚫ Monetary/Nonmonetary Method ⚫ Temporal Method ⚫ Current Rate Method
Current/Noncurrent method The underlying principal is that assets and liabilities should be translated based on their maturity Current assets translated at the spot rate noncurrent assets translated at the historical rate in effect when the item was first recorded on the books e This method of foreign currency translation was generally accepted in the United States from the 1930s until 1975. at which time fasb 8 became effective McGraw-Hilylrwoin 14-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-3 Current/Noncurrent Method ⚫ The underlying principal is that assets and liabilities should be translated based on their maturity. ◼ Current assets translated at the spot rate. ◼ Noncurrent assets translated at the historical rate in effect when the item was first recorded on the books. ⚫ This method of foreign currency translation was generally accepted in the United States from the 1930s until 1975, at which time FASB 8 became effective
Current/Noncurrent method Current assets Balance sheet Local Current translated at Currency Noncurrent the spot rate Cash 2.100DM $1,050 e.g. DM2=S1 Inventory ,500DM $750 Noncurrent fixed assets 3.000DM $1000 assets translated at Total Assets 6.600 DM $2800 the historical Current liabilities 200DM $600 rate in effect Long-Term debt 800DM $600 when the item Common stock 2.700DM $900 was first Retained earnings 900DM $700 recorded on CTA ·= the books Total liabilities and 6.600DM $2800 e.g. DM3=S1 Equity McGraw-Hilylrwoin 144 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-4 Current/Noncurrent Method ◼ Current assets translated at the spot rate. e.g. DM2=$1 ◼ Noncurrent assets translated at the historical rate in effect when the item was first recorded on the books. e.g. DM3=$1 Balance Sheet Local Currency Current/ Noncurrent Cash 2,100 DM $1,050 Inventory 1,500 DM $750 Net fixed assets 3,000 DM $1,000 Total Assets 6,600 DM $2,800 Current liabilities 1,200 DM $600 Long-Term debt 1,800 DM $600 Common stock 2,700 DM $900 Retained earnings 900 DM $700 CTA -------- -------- Total Liabilities and Equity 6,600 DM $2,800