Foreign Currency Financial Statement Translation (& Remeasurement) Authoritative Pronouncement: SFAS No.

. 52 Use when you have an investment in a foreign entity that keeps its books in another currency and the investment is such that it results in: o Control (& therefore consolidation) or o Significant influence (& therefore equity method accounting) Objectives: o Provide information that is generally compatible with the exposed economic effects of an exchange rate change on an enterprises cash flows and equity o Reflect in the consolidated statements the financial results and relationships of the consolidated entities as measured in their functional currencies in conformity with U.S. GAAP Issues: o What exchange rate(s) should be used to translate financial statement amounts? o Where/when should translation gains/losses be reported?

ACCT 6260

FC Financial Statement Translation & Remeasurement

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 Three Currencies: o Local Currency: The currency of the foreign country where the entity is located. In most cases the books will be kept in the local currency o Functional Currency: The currency of the economic environment in which the foreign entity primarily conducts its operations and generates/expends its cash based on managements judgment o Reporting Currency: The currency that the combined/consolidated results will be reported in for our purposes the U.S. Dollar Two methods: o Current rate method - Translation Used to adjust from FC to RC G/L reported in OCI o Temporal rate method - Remeasurement Used to adjust from LC to FC G/L reported in NI Exception When the functional currency is in a country that has a highly inflationary economy you should remeasure as if the reporting currency were the functional currency

ACCT 6260

FC Financial Statement Translation & Remeasurement

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Local Currency

Books Kept in Local Currency

N/A

Remeasurement Temporal Rate Method

Remeasurement Temporal Rate Method

Functional Currency

Local Currency

U.S. Dollar

Another Currency

Translation Current Rate Method

N/A

Translation Current Rate Method

Reporting Currency

U.S. Dollar

ACCT 6260

FC Financial Statement Translation & Remeasurement

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Current Rate Method (Translation) 1. FC financial statements should be restated using U.S. GAAP 2. Revenue and Expense accounts translated using the exchange rate when element was recognized (in most cases this will be the average exchange rate for the period) 3. Asset and Liability accounts using period-end exchange rates 4. Stockholders Equity as follows:
a. Contributed Capital (Common Stock and Additional Paid in Capital) using historical exchange rate when the foreign entity was begun or purchased b. Earned Capital (Retained Earnings) the beginning balance from the previous periods translation (if first period, use rate when acquired) plus translated NI less dividends using the exchange rate when declared c. Cumulative Translation Adjustment will be the plug figure to balance the balance sheet

5. Perform verification to validate results

ACCT 6260

FC Financial Statement Translation & Remeasurement

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Foreign Currency Translation Example Problem On January 2, 2002 USP, a U.S. based company, acquired for 2,000,000 Indian Rupees (INR) an 80% interest in FS Company, an Indian company. FS maintains its books in rupees and the books are in conformity with U.S. GAAP. The direct exchange rates for the INR to U.S. dollars (USD) are as follows: Date January 2 September 1 December 31 Average for 4th quarter Average for the year Spot Rate $.150 $.160 $.170 $.165 $.156

Revenues and expenses were generated evenly throughout the year. The company uses the FIFO cost flow assumption and the ending inventory was acquired during the 4th quarter. A dividend of 300,000 rupees was declared and paid on September 1st. On January 2, 2002 FS Company had the following condensed balance sheet in rupees. Assets Monetary assets Nonmonetary assets Inventory Fixed assets Total Liabilities and Stockholders Equity Monetary liabilities 1,800,000 Common stock 960,000 Additional paid-in capital 300,000 Retained earnings 480,000 Total 3,540,000

1,100,000 760,000 1,680,000 3,540,000

FS Company December 31, 2002 Translation - Current Rate Method (INR is functional currency) Adjusted Trial Balance Rupees 3,020,000 1,850,000 100,000 655,000 82,000 333,000 480,000 (300,000) 513,000 Adjusted Trial Balance Dollars

Combined Statement of Income and Retained Earnings Sales Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income Beginning Retained Earnings Dividends Ending Retained Earnings Balance Sheet Cash Accounts Receivable Inventories Land Buildings Equipment Total Assets Accounts Payable Short-term Notes Payable Bonds Payable Common Stock Additional Paid in Capital Retained Earnings Total Liabilities and Stockholders' Equity (INR) Cumulative Translation Adjustment (AOCI) Total Liabilities and Stockholders' Equity (USD)

Translation Rate

930,000 608,000 830,000 500,000 650,000 430,000 3,948,000 640,000 635,000 900,000 960,000 300,000 513,000 3,948,000

FS Company December 31, 2002 Translation - Current Rate Method (INR is functional currency) Adjusted Trial Balance Rupees 3,020,000 1,850,000 100,000 655,000 82,000 333,000 480,000 (300,000) 513,000 0.150 0.160 Adjusted Trial Balance Dollars 471,120 288,600 15,600 102,180 12,792 51,948 72,000 (48,000) 75,948

Combined Statement of Income and Retained Earnings Sales Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income Beginning Retained Earnings Dividends Ending Retained Earnings Balance Sheet Cash Accounts Receivable Inventories Land Buildings Equipment Total Assets Accounts Payable Short-term Notes Payable Bonds Payable Common Stock Additional Paid in Capital Retained Earnings Total Liabilities and Stockholders' Equity (INR) Cumulative Translation Adjustment (AOCI) Total Liabilities and Stockholders' Equity (USD)

Translation Rate 0.156 0.156 0.156 0.156 0.156

930,000 608,000 830,000 500,000 650,000 430,000 3,948,000 640,000 635,000 900,000 960,000 300,000 513,000 3,948,000

0.170 0.170 0.170 0.170 0.170 0.170 0.170 0.170 0.170 0.150 0.150

158,100 103,360 141,100 85,000 110,500 73,100 671,160 108,800 107,950 153,000 144,000 45,000

671,160

Translation - Current Rate Method Verification of Translation Adjustment Beginning net asset position Adjustments for changes in net asset position during year Net income Dividends Translated ending net asset position Ending net asset position Change in cumulative translation adjustment Beginning cumulative translation adjustment Ending cumulative translation adjustment

Rupees

Translation Rate

Dollars

Verification of Translation Adjustment Beginning net asset position Adjustments for changes in net asset position during year Net income Dividends Translated ending net asset position Ending net asset position Change in cumulative translation adjustment Beginning cumulative translation adjustment Ending cumulative translation adjustment

Rupees 1,740,000 333,000 (300,000) 1,773,000

Translation Rate 0.150 0.156 0.160 0.170

Dollars 261,000 51,948 (48,000) 264,948 301,410 (36,462) 0 (36,462)

Temporal Rate Method (Remeasurement) 1. FC financial statements should be restated using U.S. GAAP 2. Monetary Assets and Liabilities are translated using period-end exchange rates 3. Non-monetary Assets (and Liabilities, if any) are translated using historical exchange rates when assets (liabilities) were acquired 4. Stockholders Equity
a. Contributed Capital (Common Stock and Additional Paid in Capital) using the historical exchange rate when the foreign entity was begun or purchased b. Earned Capital (Retained Earnings) is a plug figure to balance the balance sheet

5. Revenue and Expense accounts translated using the average rate for the period unless they can be traced to a specific historical rate 6. Remeasurement Gain or Loss is a plug figure to Net Income that forces the Beginning Retained Earnings balance plus Net Income less Dividends to equal Ending Retained Earnings. These items are remeasured as follows:
a. Beginning Retained Earnings are the ending balance from the previous periods remaesurement (if first period, use rate when begun or purchased) b. Dividends translated using the exchange rate when declared c. Ending Retained Earnings from the Balance Sheet plug

7. Perform verification to validate results

ACCT 6260 FC Financial Statement Translation & Remeasurement Page 5

FS Company December 31, 2002 Remeasurement - Temporal Rate Method (USD is functional currency) Adjusted Trial Balance Rupees 930,000 608,000 830,000 500,000 650,000 430,000 3,948,000 640,000 635,000 900,000 960,000 300,000 513,000 3,948,000 Rupees 3,020,000 1,850,000 100,000 655,000 82,000 333,000 480,000 300,000 513,000 Rate Dollars Adjusted Trial Balance Dollars

Balance Sheet Cash Accounts Receivable Inventories Land Buildings Equipment Total Assets Accounts Payable Short-term Notes Payable Bonds Payable Common Stock Additional Paid in Capital Retained Earnings Total Liabilities and Stockholders' Equity Combined Statement of Income and Retained Earnings Sales Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Translation (remeasurement) gain/loss Net Income Beginning Retained Earnings Dividends Ending Retained Earnings

Translation Rate

Cost of goods sold Beginning inventory Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold

Rupees

Rate

Dollars

FS Company December 31, 2002 Remeasurement - Temporal Rate Method (USD is functional currency) Adjusted Trial Balance Rupees 930,000 608,000 830,000 500,000 650,000 430,000 3,948,000 640,000 635,000 900,000 960,000 300,000 513,000 3,948,000 Rupees 3,020,000 1,850,000 100,000 655,000 82,000 333,000 480,000 (300,000) 513,000 0.150 0.160 72,000 (48,000) Adjusted Trial Balance Dollars 158,100 103,360 136,950 75,000 97,500 64,500 635,410 108,800 107,950 153,000 144,000 45,000 76,660 635,410 Dollars 471,120 276,570 15,000 102,180 12,792

Balance Sheet Cash Accounts Receivable Inventories Land Buildings Equipment Total Assets Accounts Payable Short-term Notes Payable Bonds Payable Common Stock Additional Paid in Capital Retained Earnings Total Liabilities and Stockholders' Equity Combined Statement of Income and Retained Earnings Sales Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Translation (remeasurement) gain/loss Net Income Beginning Retained Earnings Dividends Ending Retained Earnings

Translation Rate 0.170 0.170 0.165 0.150 0.150 0.150 0.170 0.170 0.170 0.150 0.150 plug

Rate 0.156 Schedule 0.150 0.156 0.156

Cost of goods sold Beginning inventory Purchases Cost of goods available for sale Less: Ending inventory Cost of goods sold

Rupees 760,000 1,920,000 2,680,000 830,000 1,850,000

Rate 0.150 0.156 0.165

Dollars 114,000 299,520 413,520 136,950 276,570

Remeasurement - Temporal Rate Method Verification of Remeasurement Gain/Loss Beginning net monetary asset/liability position Adjustments for changes in net monetary position during year Increase in cash and receivables from sales Decrease in monetary assets or increase in monetary liabilities Purchases Other expenses Income taxes Dividends Net monetary asset/liability position - translated amounts Ending net monetary asset/liability position Remeasurement Gain/Loss

Rupees

Translation Rate

Dollars

Verification of Remeasurement Gain/Loss Beginning net monetary asset/liability position Adjustments for changes in net monetary position during year Increase in cash and receivables from sales Decrease in monetary assets or increase in monetary liabilities Purchases Other expenses Income taxes Dividends Net monetary asset/liability position - translated amounts Ending net monetary asset/liability position Remeasurement Gain/Loss

Rupees (700,000) 3,020,000 (1,920,000) (655,000) (82,000) (300,000) (637,000)

Translation Rate 0.150 0.156 0.156 0.156 0.156 0.160 0.170

Dollars (105,000) 471,120 (299,520) (102,180) (12,792) (48,000) (96,372) (108,290) (11,918)