Chapter 11 - Chapter11 TranslationExposure...

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Chapter 11 Translation Exposure
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Translation Exposure Translation Exposure: change in net worth due to change in home currency value of foreign assets and liabilities - foreign currency appreciates(depreciates), foreign  value Liabilities value is different - lose net worth if assets depreciate more than  liabilities  or appreciate less than liabilities - gain net worth if assets appreciate more than  liabilities  or depreciate less than liabilities - have translation exposure regardless of 
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Translation Exposure Factors affecting Translation Exposure: Organizational: how the foreign division operates  in  relation to the domestic parent - Integrated foreign entity:  foreign operation is  an extension of parent firm, dependent on  parent for supplies - should be valued in domestic currency - Self-sustaining foreign entity: foreign subsidiary  operating independent of parent - should be valued in foreign currency
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Translation Exposure Factors affecting Translation Exposure (cont’d): Functional currency: Currency that the foreign  operation normally does business in - integrated subsidiary uses parent firm country’s  currency - self-sustaining entity uses foreign currency - firm management must evaluate operations  and choose functional currency for each foreign  subsidiary
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Translation Methods There are two basic methods of accounting for  translation effects (restating) - differ in the time at which exchange rate is  taken to value assets & liabilities - current rate method: use exchange rate at  time  statements are prepared - temporal method: use exchange rate at  time  assets and liabilities are booked
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Translation Methods Current rate method: Assets and liabilities restated at current exchange rate
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Chapter 11 - Chapter11 TranslationExposure...

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