CH10 - CHAPTER 10 TRANSLATION EXPOSURE MANAGEMENT CHAPTER...

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CHAPTER 10 TRANSLATION EXPOSURE MANAGEMENT CHAPTER OUTLINE I. Translation Rules a) Current/noncurrent method b) Monetary/nonmonetary method c) Temporal method d) Current rate method e) Comparison of the four translation methods II. FASB No. 8 and FASB No. 52 a) Functional currency b) Differences between FASB Nos. 8 and 52 c) Translation of foreign-currency financial statements III. Hedging Translation Exposure a) Balance-sheet hedge b) Indirect fund-adjustment methods c) Exposure netting d) Leading and lagging e) Transfer pricing IV. Summary 80
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CHAPTER OBJECTIVE Chapter 10 discusses four translation rules commonly used by multinational companies (MNCs) to consolidate their worldwide operations into home currency. The translation rules of FASB no. 8 and FASB no. 52 are presented as are some techniques designed to reduce translation risk. KEY TERMS AND CONCEPTS Translation exposure sometimes called accounting exposure measures the effect of an exchange rate change on published financial statements of a firm. Current/non-current method assumes that financial-statements accounts should be grouped according to maturity. Monetary/non-monetary method is the method under which monetary assets and monetary liabilities are translated at current exchange rates while non-monetary assets, non-monetary liabilities, and owners' equity are translated at historical rates. Temporal method is the method under which inventory is usually translated at the historical rate, but it could be translated at the current rate if inventory is carried at market prices or at replacement costs. Current rate method is the method that translate all assets and liabilities at the current exchange rates except owners' equity. Parent currency, sometimes called reporting currency, is the currency of the country where the parent company is located. Functional currency is the currency of the country where the foreign operation of a multinational company is located. Hedge is an approach designed to reduce or offset a possible loss. Balance sheet hedge involves the selection of the currency in which exposed assets and liabilities are denominated so that an exchange rate change would make exposed assets equal to exposed liabilities. Exposure netting is a method of offsetting exposures in one currency with exposures in the same or another currency in such a way that gains or losses on the first exposure will be offset by losses or gains on the second exposure. Leading means to pay or collect early. Lagging means to pay or collect late. Transfer prices are prices of goods and services sold between related parties, such as a parent and its subsidiary. 81
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ANSWERS TO END-OF-CHAPTER QUESTIONS 1. Explain the conditions under which items and/or transactions are exposed to foreign exchange risks. Items and/or transactions are said to be exposed if the following two conditions
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This note was uploaded on 03/22/2009 for the course MANAGEMENT 5689-9856 taught by Professor Nialamnu during the Fall '08 term at Indiana State University .

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CH10 - CHAPTER 10 TRANSLATION EXPOSURE MANAGEMENT CHAPTER...

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