Reign currency translation effects on accumulated

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reign Currency Translation Effects on Accumulated Other Comprehensive Income y companies have international transactions denominated in foreign currencies. They might hase assets in foreign currencies, borrow money in foreign currencies, and transact business their customers and suppliers in foreign currencies. Other companies might have subsidiar- whose entire balance sheets and income statements are stated in foreign currencies. Financial ements prepared according to U.S. GAAP must be reported in $US. This means that financial ements of foreign subsidiaries must be translated into $US before they are consolidated with Accumulated Other Comprehensive Income $ (726) (736) (1,462) (213) (1,675) (242) $(1,917)
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8-21 Module 8 I Equity Recognition and Owner Financing IFRS Alert The IFRS counterpart to AOCI is the General Reserve and other reserve accounts. Reserves is the IFRS term for all equity accounts other than contributed capital. Retained earnings is typically the largest reserve. The components of AOCI are reported individually as additional reserve accounts rather than as one account. those of the U.S. parent company. This translation process can markedly alter both the bal sheet and income statement. We discuss the income statement effects of foreign currency tra tion in Module 5 and the balance sheet effects in this section. Consider a U.S. company with a foreign subsidiary that conducts its business in Euros. ~ subsidiary prepares its financial statements in Euros. Assume that the $US weakens vis-a-vis Euro during the current period-that is, each Euro can now purchase more $US. When the ance sheet is translated into $US, the assets and liabilities are reported at higher $US than bef the $US weakened. This result is shown in accounting equation format in Exhibit 8.3. 2 Balance Sheet Effects of Changes in U.S. Dollar to Euro Exchange Rates Currency Assets Liabilities + Equity $US weakens. . . . . . . . . . . . .. Increase $US strengthens. . . . . . . . . . .. Decrease Increase Decrease + + Increase Decrease The amount reflected as an increase (decrease) in equity is called a foreign currency translat adjustment. The cumulative foreign currency translation adjustment is included in accumul other comprehensive income (or loss) as illustrated above for Aon. Foreign currency tran tion adjustments are direct adjustments to stockholders' equity; they do not impact reported income. Because assets are greater than liabilities for solvent companies, the cumulative transzs- tion adjustment is positive when the $US weakens and negative when the dollar strengthens. Referring to Aon's accumulated other comprehensive income table on the previous pag the cumulative foreign currency translation is a gain of $301 million at the beginning of 201 which shrinks by $133 million (net of $2 million credited to noncontrolling shareholders), ing the year to yield a cumulative year-end gain of $168 million. The $133 million reducri in Aon's equity reflects a strengthening of the $US vis-a-vis the foreign currencies in whic; Aon transacted in 2010. That is, as the $US strengthened, Aon's foreign assets and liabili - translated into fewer $US at year-end. This decreased Aon's equity (because assets are greaser
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