CH10sguide - 10 Translation Exposure Management Chapter...

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Chapter Objectives 1. To define translation exposure and discuss its affect on MNC performance. 2. To describe the four translation rules available and to calculate translation exposure using these four methods. 3. To distinguish between the past (FASB No. 8) and current (FASB No. 52) translation methods prescribed by the Financial Accounting Standards Board. 4. To explain how to hedge translation exposure. Chapter Outline I. Translation Exposure A. Translation exposure, also known as accounting exposure, measures the effect of an exchange rate on the published financial statements of a firm. i. Foreign-currency assets and liabilities that are translated at the current exchange rate are considered to be exposed. ii. The difference between exposed assets and liabilities is called net exposure. B. Translation gains and losses do not involve cash flows and are only of a paper nature. C. Translation exposure affects a company’s ability to raise capital, the cost of capital earnings per share, its stock price, and key financial ratios. D. Accounting for foreign currency translation is a controversial issue. i. One of the main problems is that foreign exchange rates are rarely fixed. E. Different translation rates will result in different reported results. Foreign Exchange Risk Management      122 10 Translation Exposure  Management
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i. The translation of financial statement items denoted in foreign currencies will result in foreign exchange gains or losses depending on the rules used. F. The four most common translation methods used are current-noncurrent, monetary-nonmonetary, temporal, and current rate. II. Four Translation Rules A. Current-Noncurrent Method i. All current assets and current liabilities of foreign affiliates are translated into the parent currency at current exchange rates. ii. All noncurrent assets, noncurrent liabilities, and owner’s equity are translated at historical exchange rates. B. Monetary-Nonmonetary Method i. Monetary assets and monetary liabilities are translated at current exchange rates. 1. Monetary assets include cash, accounts receivables, and notes receivable. In general, all liabilities are monetary. ii. Nonmonetary assets, nonmonetary liabilities, and owner’s equity are translated at historical rates. 1. Nonmonetary assets include inventory and fixed assets. C. Temporal Method i. This method produces essentially the same results as the monetary- nonmonetary method under generally accepted accounting principles of historical accounting in the United States. ii. The only difference is that under the temporal method, 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. 1.
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CH10sguide - 10 Translation Exposure Management Chapter...

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