Ch 10 Foreign Currency Handout REVISED2

Ch 10 Foreign Currency Handout REVISED2 - ACC 308...

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ACC 308 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS (ASC 830) I. FOCUS A. Conversion of foreign currency financial statements of subsidiaries for the purpose of consolidation and/or reporting on the equity method B. Assume that financial statements are 1. in accordance with U.S. GAAP (no worksheet entries needed) 2. reported using the foreign currency as the monetary unit II. Determine THE FUNCTIONAL CURRENCY of the subsidiary A. If foreign operation is "relatively self-contained and integrated within a particular country" - functional currency = FOREIGN CURRENCY currency of that country - then translate using current rate method - resulting gain/loss ends up on balance sheet as Accum. OCI B. If foreign operation is "primarily a direct and integral component or extension of parent co.'s operation" - functional currency = parent's currency - then translate using remeasurement method (TEMPORAL) - resulting gain/loss ends up on the income statement C. Exception to 1st rule: If foreign operation in "highly inflationary economy" - - functional currency = parent's currency (highly inflationary = cumul. of approx. 100% over 3 years)
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III. If sub's financial statements are already stated in functional currency, translate financial statements into parent's currency using current rate method : A. Translate components of NI using rates when components recognized (average rates for the year can be used) B. Translate Div. Declared using rate when declared. C. To get translated RE (retained earnings) at the end of year: Translated RE from last year's fin'l statements + Translated net income - Translated dividends Translated RE at the end of the year D. E. Translate CS and APIC using rate when CS issued. F. Plug for Accumulated Other Comprehensive Income = Translated Assets - Liab. - CS - APIC - RE. The current year addition to Accumulated Other Comprehensive Income = end of year balance - beginning of year balance G. The point of all this: Historical costs of assets & liabilities in functional currency are translated at current rates. The relationships between assets and liabilities as measured in the functional currency are maintained. Common size Balance sheet (Assets = 100%, L& SE = 100%) will show the same % for assets and liabilities whether foreign currency or US $ are used. H. Important 1. Remember, Accumulated Comprehensive Income is a SE account. The current year's addition to the account can be reported in one of three ways used to report Comprehensive Income a) second separate income statement b) combined income statement of comprehensive income c) part of the statement of stockholders’ equity 2. Why not directly on the income statement effect? Justification: if sub is self-contained, its cash flows do not affect parent's cash flow.
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Examples of 2 alternatives for reporting comprehensive income (plus added disclosure requirements) 1. Second Income Statement Wonder Which, Inc. Income Statement
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This note was uploaded on 01/27/2012 for the course ACC 545 taught by Professor Murphy during the Winter '11 term at DePaul.

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Ch 10 Foreign Currency Handout REVISED2 - ACC 308...

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