Chapter 16 - Solution Manual

2 the foreign entitys statements must be adjusted if

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2. The foreign entity's statements must be adjusted (if necessary) to comply with generally accepted accounting principles in the United States. 3. The financial statements of the foreign entity are translated into the reporting currency of the parent company (usually the U.S. dollar). Assets and liabilities are translated at the current exchange rate at the balance sheet date. Revenues, expenses, gains, and losses are translated at the rate in effect at the date they were first recognized.
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343 4. Exchange gains and losses are accumulated and reported as a separate component of stockholders' equity in the unrealized capital section. FASB ASC 830 defines two situations in which the local currency would not be the functional currency. 1. The foreign country's economic environment is highly inflationary (over 100 percent cumulative inflation over the past three years such as recently experienced by Argentina and Brazil). 2. The company's investment is not considered long-term. In these cases the foreign company's functional currency is defined by the U.S. dollar and the financial statements are translated using the FASB Statement No. 8 approach. That is: 1. Each transaction was recorded at the historical exchange rate (the exchange rate in effect at the transaction date). 2. All cash, receivables, and payables denominated in foreign currencies were adjusted using the current rate at the balance sheet date. 3. All assets carried at market price were adjusted to equivalent dollar prices on the balance sheet date. 4. For all other assets, the particular measurement basis were used to determine the translation rate. 5. Revenues and expenses were translated in a manner that produced approximately the same dollar amount that would have resulted had the underlying transactions been translated into dollars on the dates they occurred. An average rate could be used in most cases. 6. All exchange gains and losses were included in the determination of net income. 7. Gains and losses on forward exchange contracts (agreements to exchange currencies at a predetermined rate) entered into to hedge a foreign currency–exposed net asset or liability position or to speculate were included in net income, while gains and losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment were typically deferred. 8. All exchange gains and losses str reported as a component of income. b. Under the guidelines contained at FASB ASC 830, translation is the purpose of expressing financial statements measured in one unit of currency (the reporting currency). The translation process is performed for the purpose of preparing financial statements and assumes that the foreign accounts will not be liquidated into U.S. dollars. Therefore, translation adjustments are disclosed as a part of stockholder's equity rather than as adjustments to income.
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