M11_EITE3518_13E_IM_C11 - Chapter 11 Translation Exposure Questions 11-1 By Any Other Name What does the word translation mean Why is translation

M11_EITE3518_13E_IM_C11 - Chapter 11 Translation Exposure...

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49 Chapter 11 Translation Exposure Questions 11-1. By Any Other Name. What does the word translation mean? Why is translation exposure sometimes called accounting exposure ? Translation refers to the process by which the financial statements of separately incorporated subsidiaries are added to the financial statements of a parent in order to prepare a consolidated financial statement that will reflect the economic reality of the entire enterprise, rather than just the financial status of one separately incorporated segment. Consolidation of domestic subsidiaries (same country as parent) is simple because only one currency is involved. The financial statements of subsidiaries of a multinational enterprise are kept in other currencies, so consolidation involves adjusting each year for changes in the value of those separate currencies. The process of restating the foreign currency financial statements of a foreign subsidiary is called translation. Because translation occurs as a result of the accounting process, the restatement is most often called “accounting.” Because exchange rates change from one time period to another, imbalances occur. These imbalances may cause an accounting-derived gain or loss, which is taken into the equity section of the parent’s consolidated statement. The possibility of gain or loss gives rise to the word “exposure.” 11-2. Converting Financial Assets. In the context of preparing consolidated financial statements, are the words translate and convert synonyms? They are not synonyms. To translate is to express the value of a financial account (assets, liability, revenue, or expense) originally measured in one currency, in another currency. Translation is pure measurement; no transaction is involved.

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