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Unformatted text preview: 536-6a_note, 11S FIN 536 SU Page 1 of 11 Topic 6 Managing Accounting Exposure (Chapter 13) I.Outline A.Identify Translation Exposure B.Measure Translation Exposure C.Manage Translation Exposure II.Homework Assignment Chapter13End-of-Chapter Question6-8End-of-Chapter Problem1-4, 8-9 Exam Sample Problem (ES)1-3Supplementary Homework Problem (ES)1-4========================================================= Class Notes I.Identify Accounting Exposure A.Assets and liabilities that are NOT translated at historical exchange rate are exposed to exchange rate changes 1.Example: B.Translation exposure = Exposed assets (E.A.) - Exposed liabilities (E.L.) 1.If exposed assets > exposed liabilities ==> ? 2.If exposed assets < exposed liabilities ==> ? 3.If exposed assets = exposed liabilities ==> ? 0 1 536-6a_note, 11S FIN 536 SU Page 2 of 11 C.Example: ABC Japan and XYZ Japan are Japanese subsidiaries of US parent firms. ABC Japan XYZ Japan Exposed Asset 10 billion 10 billion Exposed Liability 5 billion 18 billion Net Exposure ???? ???? Current S100 /$ 100 /$ a. Translation Gain/Loss if S1= 120 /$ b. Translation Gain/Loss if S1= 90 /$ 1.Example 1.a: What is ABC Japans translation gain/loss if S1= 120 /$? 2.Example 1.b: What is ABC Japans translation gain/loss if S1= 90 /$? 0 1 0 1 536-6a_note, 11S FIN 536 SU Page 3 of 11 3.Example 2.a: What is XYZ Japans translation gain/loss if S1= 120 /$? 4.Example 2.b: What is XYZ Japans translation gain/loss if S1= 90 /$? II.Accounting Translation Methods A.Basic: Accounting controversy surrounds the choice of what is exposed and what isnt exposed. Which Method? How to translate? What is exposed? 1.Two major translation methods a)Current Rate Method: The most prevalent method used today b)Temporal Method: A variation of the monetary/nonmonetary method 2.Exchange rate for translation: a)Exposed item: New exchange rate (1)Income statement: Weighted average rate or Actual rate (2)Balance Sheet: Current rate b)Not Exposed item: Historical exchange rate 3.Five-step procedure to translate a balance sheet statement a)Step 1: Identify nonexposed items b)Step 2: Identify exposed items c)Step 3: Translate to $ value d)Step 4: Balance the Balance sheet e)Step 5: Confirmation 0 1 0 1 536-6a_note, 11S FIN 536 SU Page 4 of 11 B.Current Rate Method 1.Summary Income statement (I/S) Balance Sheet (B/S) Exposed (new rate) Weighted average rate Actual rate (dividend distribution)Current Rate Asset Liability Not exposed (historical rate) ------ Common Stock and paid-in capital Composite rate for RE Translation Gain/loss Not included in I/S Cumulative translation adjustment account (CTA) 2.Example: use Current Rate method to translate a balance Sheet....
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This note was uploaded on 11/07/2011 for the course FIN 536 taught by Professor Staff during the Spring '11 term at S.F. State.

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536-6a_note[1] - 536-6a_note, 11S FIN 536 SU Page 1 of 11...

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