Monetary/Nonmonetary Method The underlying principal is that monetary accounts have a similarity because their value represents a sum of money whose value changes as the exchange rate changes All monetary balance sheet accounts(cash, marketable securities, accounts receivable, etc. of a foreign subsidiary are translated at the current exchange rate All other(nonmonetary) balance sheet accounts(owners equity, land) are translated at the historical exchange rate in effect when the account was first recorded McGraw-Hilylrwoin 14-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-5 Monetary/Nonmonetary Method ⚫ The underlying principal is that monetary accounts have a similarity because their value represents a sum of money whose value changes as the exchange rate changes. ⚫ All monetary balance sheet accounts (cash, marketable securities, accounts receivable, etc.) of a foreign subsidiary are translated at the current exchange rate. ⚫ All other (nonmonetary) balance sheet accounts (owners’ equity, land) are translated at the historical exchange rate in effect when the account was first recorded
Monetary/Nonmonetary Method All monetary Balance sheet Local Monetary/ balance sheet Currenct Nonmonetary accounts are Cash 2,100DM $1,050 translated at the Inventory 1.500DM $500 current exchange 3.000DM $1000 rate e. g. DM2=$1 Net fixed assets Total assets 6.600DN $2,550 All other balance Current liabilities 1,200DM $600 sheet accounts are translated at the Long-Term debt 1800DM $900 historical exchange Common stock 2,700DM $900 rate in effect when Retained earnings 900DM $0 the account was first CTa recorded Total Liabilities and 6.600 DM $2400 e. g. DM3=$1 Equity McGraw-Hilylrwoin 14-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-6 Monetary/Nonmonetary Method ⚫ All monetary balance sheet accounts are translated at the current exchange rate. e.g. DM2=$1 ⚫ All other balance sheet accounts are translated at the historical exchange rate in effect when the account was first recorded. e.g.DM3=$1 Balance Sheet Local Currency Monetary/ Nonmonetary Cash 2,100 DM $1,050 Inventory 1,500 DM $500 Net fixed assets 3,000 DM $1,000 Total Assets 6,600 DM $2,550 Current liabilities 1,200 DM $600 Long-Term debt 1,800 DM $900 Common stock 2,700 DM $900 Retained earnings 900 DM $ 0 CTA -------- -------- Total Liabilities and Equity 6,600 DM $2,400
Temporal Method The underlying principal is that assets and liabilities should be translated based on how they are carried on the firm s books o Balance sheet account are translated at the current spot exchange rate if they are carried on the books at their current value o Items that are carried on the books at historical costs are translated at the historical exchange rates in effect at the time the firm placed the item on the lOoKS McGraw-Hilylrwoin 14-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-7 Temporal Method ⚫ The underlying principal is that assets and liabilities should be translated based on how they are carried on the firm’s books. ⚫ Balance sheet account are translated at the current spot exchange rate if they are carried on the books at their current value. ⚫ Items that are carried on the books at historical costs are translated at the historical exchange rates in effect at the time the firm placed the item on the books
Temporal Method Items carried on the Balance Sheet Local Temporal books at their Currency current value are Cash 2.100DM $1050 translated at the Inventory 1,500DM $900 spot exchange rate Net fixed assets 3.000DM $1000 e. g. DM2=$1 Total assets 6.600DM $2950 Items that are Current liabilities 1200DM $600 carried on the Long-Term debt 1,800DM $900 books at historical Common stock 2.700DM $900 costs are translated Retained earnings 900DM $0 at the historical CTA exchange rates Total liabilities and 6.600 DM $2400 e.g. DM3=S equity McGraw-Hilylrwoin 14-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-8 Temporal Method ⚫ Items carried on the books at their current value are translated at the spot exchange rate. e.g. DM2=$1 ⚫ Items that are carried on the books at historical costs are translated at the historical exchange rates. e.g. DM3=$1 Balance Sheet Local Currency Temporal Cash 2,100 DM $1,050 Inventory 1,500 DM $900 Net fixed assets 3,000 DM $1,000 Total Assets 6,600 DM $2,950 Current liabilities 1,200 DM $600 Long-Term debt 1,800 DM $900 Common stock 2,700 DM $900 Retained earnings 900 DM $ 0 CTA -------- -------- Total Liabilities and Equity 6,600 DM $2,400
Current rate method o All balance sheet items(except for stockholder's equity) are translated at the current exchange rate Very simple method in application aplug equity account named cumulative translation adjustment is used to make the balance sheet balance McGraw-Hilylrwoin 14-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-9 Current Rate Method ⚫ All balance sheet items (except for stockholder’s equity) are translated at the current exchange rate. ⚫ Very simple method in application. ⚫ A “plug” equity account named cumulative translation adjustment is used to make the balance sheet balance