Notes on Foreign Currency Translation and Remeasurement

I. Translation versus Remeasurement

The purpose of translation is to transform a subsidiarys financial statements, prepared in its functional currency,
into the reporting currency of the parent. The purpose of Remeasurement is to restate transactions from one
currency into the functional currency of the entity. Remeasurement is also required when a subsidiarys financial
statements have been denominated in a currency other than the subsidiarys functional currency.

II. Translating Revenues and Expenses and Gains/Losses

The historical rate that was in effect when the revenues and expenses were incurred should be used unless those
revenues and expenses occur throughout the year, then a weighted average exchange rate for the year may be
used.
A gain or loss occurring on a specific date should be translated using the rate in effect on that day.

III. Circumstances would the translation of a foreign subsidiarys financial statements not required

a. when the subsidiarys functional currency is already the reporting currency

b. when the subsidiary operates in a highly inflationary economy

IV. Others

A foreign subsidiary of a US Corporation purchased equipment on January 4, 2017.

A. How would depreciation expense on the equipment be translated for 2017? - Average
B. How would depreciation expense on the equipment be remeasured for 2017? Historical (exchange rate in effect
when the equipment was purchased).

What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary?
What justification can be given for using this exchange rate?

Assets and liabilities are translated using the current exchange rate, the rate in effect at the balance sheet date. This
rate is chosen because assets and liabilities are expected to affect future cashflows. Therefore, they should be
translated using the most up-to-date exchange rates available.

What is the justification for the remeasurement of foreign currency transactions?

Remeasurement is needed for transactions denominated in a currency other than the entity's functional currency. A
U.S. company which engages in transactions in other countries may have to remeasure some of its transactions. The
implicit justification for remeasurement is that foreign currency transactions which affect monetary assets and
liabilities have a direct effect on the entity's cash flows. There will be direct effects on future cash flows in the
functional currency, and thus an effect on net income.
Test your knowledge.
I. A foreign subsidiary was purchased on January 1, 2017. Determine the exchange rate used to restate
the following accounts at December 31, 2017. Land was purchased on October 1, 2017. Relevant
exchange dates follow:

(A) January 1, 2017

(B) October 1, 2017
(C) December 31, 2017
(D) Average, 2017
(E) Composite, using multiple dates.

Identify the exchange rate used to translate items 1-5

____ 1. Land.
____ 2. Equipment.
____ 3. Bonds payable.
____ 4. Common stock.
____ 5. Retained earnings

Identify the exchange rate used to remeasure the items 6-10:

____ 6. Land.
____ 7. Equipment.
____ 8. Bonds payable.
____ 9. Common stock.
____ 10. Retained earnings

II.
Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2016. Selected account balances are
available for the year ended December 31, 2017, and are stated in euro, the local currency.

Sales 400,000
Inventory (bought on February 1, 2017) 20,000
Equipment (bought on January 1, 2016) 90,000
Dividends (paid on September 1, 2017) 20,000
Accumulated depreciation Equipment 12/31/17 45,000
Depreciation expense Equipment, 2017 9,000

Relevant exchange rates are given below:

January 1, 2016 $ .91
January 1, 2017 .93
February 1, 2017 .94
September 1, 2017 .97
December 31, 2017 1.01
4th quarter average, 2016 .90
4th quarter average, 2017 .98
Average, 2017 .95
Questions:
Assume the functional currency is the euro, compute the restated amount for sales for 2017.
A) $364,000.
B) $372,000.
C) $380,000.
D) $360,000.
E) $404,000

Assume the functional currency is the euro, compute the restated amount for inventory for 2017.
A) $18,600.
B) $19,600.
C) $18,000.
D) $20,200
E) $19,000.

Assume the functional currency is the euro, compute the restated amount for dividends for 2017.
A) $19,000.
B) $20,200.
C) $18,600.
D) $19,400.
E) $19,600.

Assume the functional currency is the euro, compute the restated amount for depreciation expense for 2017.
A) $8,190.
B) $8,370.
C) $8,820.
D) $9,090.
E) $8,550.

Assume the functional currency is the U.S. dollar, compute the restated amount for sales for 2017.
A) $364,000.
B) $372,000.
C) $380,000.
D) $360,000.

Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for 2017. A) $19,000.
B) $20,200.
C) $18,600.
D) $19,400.
E) $19,600

Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated depreciation for
2017.
A) $40,950.
B) $41,850.
C) $45,450.
D) $42,750.
E) $44,100.