Chapter 13CHAPTER THIRTEEN--THE TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN AFFILIATESI.ACCOUNTING FOR OPERATIONS IN FOREIGN COUNTRIESA.A U.S. firm may maintain branch offices or hold equity interests in companies that are domiciled in foreign countries. As a general rule, a foreign subsidiary is consolidated if the parent company owns, directly or indirectly, a controlling interest in the voting stock of the subsidiary or otherwise exercises the ability to control the activities of the subsidiary. B.The exceptions to the general rule are as follows:1.The intent of the control is likely to be temporary.2.Control does not actually rest with the parent company. A foreign entity may operate under conditions of foreign exchange restrictions, controls, or other government-imposed regulations that are of a type that raise significant doubt on the parent’s ability to control the subsidiary.II.TRANSLATING FINANCIAL STATEMENTS OF FOREIGN AFFILIATESA.A U.S. company maintaining a branch office in a foreign country or holding an equity interest in a foreign company must convert the account data expressed in a foreign currency into dollars before the financial statements can be combined or consolidated. Furthermore, if the equity method of accounting is used to account for an investment in a foreign investee company, the financial statements of the affiliate must be converted into dollars before the investor's share of the investee's reported net income or loss is properly determinable. The conversion from another currency into the currency of the parent company is frequently called “translation”.B.In the process of translation, all accounts of the foreign entity stated in units of foreign currency are converted into the reporting currency by multiplying the foreign currency amounts by an exchange rate. 1.The current exchange rateis the spot rate in effect at the end of the accounting period (i.e., the balance sheet date). 2.The historical exchange rateis the spot rate in effect on the date a transaction takes place.
C.The translation of some accounts using the current exchange rate and others using the historical exchange rate will result in an inequality between the total of the debit account balances and the total of the credit account balances. This difference may be referred to as a translation adjustmentor translation gain or loss. The amount of the translation adjustment is affected by an entity’s accounting exposure to changes in the exchange rate. Current accounting standards require that the translation adjustment (gain or loss) be reported currently in income or deferred as a component of stockholders’ equity, depending on the method used to translate the account. The appropriate method is not a free choice, but rather is dictated by the circumstances as described in
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