Chapter_14 - Chapter Outline Translation Methods FASB...

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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
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Translation Methods Current/Noncurrent Method Monetary/Nonmonetary Method Temporal Method Current Rate Method
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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.
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Current/Noncurrent Method Current assets translated at the spot rate. e.g. €2=$1 Noncurrent assets translated at the historical rate in effect when the item was first recorded on the books. e.g. €3=$1 Balance Sheet Local Currency Current/ Noncurrent Cash € 2,100 $1,050 Inventory € 1,500 $750 Net fixed assets € 3,000 $1,000 Total Assets € 6,600 $2,800 Current liabilities € 1,200 $600 Long-Term debt € 1,800 Common stock € 2,700 $900 Retained earnings € 900 $700 CTA -------- -------- Total Liabilities and Equity € 6,600
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Monetary/Nonmonetary Method The underlying principle 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
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Monetary/Nonmonetary Method All monetary balance sheet accounts are translated at the current exchange rate. e.g. €2=$1 All other balance sheet accounts are translated at the historical exchange rate in effect when the account was Balance Sheet Local Currency Monetary/ Nonmonetary Cash € 2,100 $1,050 Inventory € 1,500 $500 Net fixed assets € 3,000 $1,000 Total Assets € 6,600 $2,550 Current liabilities € 1,200 $600 Long-Term debt € 1,800 $900 Common stock € 2,700 Retained earnings € 900 $0 CTA -------- -------- Total Liabilities and Equity € 6,600 $2,400
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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.
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Temporal Method Items carried on the books at their current value are translated at the spot exchange rate.
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This note was uploaded on 07/16/2011 for the course FINA 5331 taught by Professor Staff during the Spring '08 term at UT Arlington.

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Chapter_14 - Chapter Outline Translation Methods FASB...

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