Ch010-Management-of-Translation-Exposure

Eun/Resnick121Eun&Resnick4eCHAPTER10ManagementofTranslationExposureTranslationMethodsCurrent/NoncurrentMethodMonetary/NonmonetaryMethodTemporalMethodCurrentRateMethodFinancialAccountingStandardsBoardStatement8FinancialAccountingStandardsBoardStatement52TheMechanicsoftheFASB52TranslationProcessHighlyInflationaryEconomiesCASEAPPLICATION:ConsolidationofAccountsaccordingtoFASB52:TheCentraliaCorporationManagementofTranslationExposureTranslationExposureversusTransactionExposureHedgingTranslationExposureBalanceSheetHedgeDerivativesHedgeTranslationExposureversusOperatingExposureEmpiricalAnalysisoftheChangefromFASB8toFASB52SummaryMINICASE:SundanceSportingGoods,Inc.TranslationMethods1Translationexposurerefersto:a)accountingexposureb)theeffectthatanunanticipatedchangeinexchangerateswillhaveontheconsolidatedfinancialreportsofanMNCc)thechangeinthevalueofaforeignsubsidiariesassetsandliabilitiesdenominatedinaforeigncurrency,asaresultofexchangeratechangefluctuations,whenviewedfromtheperspectiveoftheparentfirmd)alloftheaboveAnswer:d)2TherecognizedmethodsforconsolidatingthefinancialreportsofanMNCare:a)short/longtermmethod,current/futuremethod,flexible/inflexiblemethod,andeconomic/noneconomicmethodb)current/noncurrentmethod,monetary/nonmonetarymethod,short/longtermmethod,andcurrent/futuremethodc)current/noncurrentmethod,monetary/nonmonetarymethod,temporalmethod,andcurrentratemethodd)temporalmethod,currentratemethod,flexible/inflexiblemethod,andeconomic/noneconomicmethodAnswer:c)Eun/Resnick1223Howmanymethodofforeigncurrencytranslationhavebeenusedinrecentyears?(U.S.GAAP.)a)Oneb)Twoc)Threed)FourAnswer:d)4Thedifferencebetweenaccountingexposureandtranslationexposurea)Translationisaboutgoingfromonelanguagetoanother,accountingisjustaboutthenumbers.b)Accountingexposureandtranslationexposurearethesamething.c)Hedgingonealwaysinvolvesincreasingtheotherd)HedgingonemightinvolveincreasingtheotherAnswer:b)5Whenexchangerateschangea)Thevalueofaforeignsubsidiary’sforeigncurrencydenominatedassetsandliabilitieschangetonewnumbersstilldenominatedintheforeigncurrency.b)Thevalueofaforeignsubsidiary’sforeigncurrencydenominatedassetsandliabilitieschangewhenredenominatedintothehomecurrency.c)Hedgingshouldbedoneafterthechange.d)NoneoftheaboveAnswer:b)Current/NoncurrentMethod6ThegenerallyacceptedmethodforconsolidatingthefinancialreportsofanMNCfromthe1930sto1975was:a)Current/noncurrentmethodb)Monetary/nonmonetarymethodc)Temporalmethodd)CurrentratemethodAnswer:a)7Whenusingthecurrent/noncurrentmethod,currentassetsaredefinedasa)Inventorythatiscurrentlysalableb)Assetswithamaturityofoneyearorlessc)Assetswithamaturityof90daysorlessd)NoneoftheaboveAnswer:b)8Whenusingthecurrent/noncurrentmethod,a)Mostincomestatementitemsaretranslatedattheaverageexchangeratefortheaccountingperiod.b)Revenueandexpenseitemsthatareassociatedwithnoncurrentassetsorliabilitiesaretranslatedatthehistoricalratethatappliestotheapplicablebalancesheetitems.c)Depreciationexpenseistranslatedatthehistoricalratethatappliestotheapplicabledepreciableassetitems.d)AlloftheaboveAnswer:d)Eun/Resnick1239Theunderlyingprincipleofthecurrent/noncurrentmethodisa)Assetsandliabilitiesshouldbetranslatedbasedontheirmaturityb)Monetarybalancesheetaccountsshouldbetranslatedatthespotrate;nonmonetaryaccountsaretranslatedatthehistoricalrateineffectwhentheaccountwasfirstrecordedc)Monetaryaccountsaretranslatedatthecurrentexchangerate;otheraccountsaretranslatedatthecurrentexchangerateiftheyarecarriedonthebooksatcurrentvalue;itemscarriedathistoricalcostaretranslatedathistoricexchangerates.d)Allbalancesheetaccountsaretranslatedatthecurrentexchangerate,exceptstockholderequityAnswer:a)10Underthecurrent/noncurrentmethoda)Aforeignsubsidiarywithcurrentassetsinexcessofcurrentliabilitieswillcauseatranslationgain(loss)ifthelocalcurrencyappreciates(depreciates).b)Aforeignsubsidiarywithcurrentassetsinexcessofcurrentliabilitieswillcauseatranslationloss(gain)ifthelocalcurrencyappreciates(depreciates).c)Aforeignsubsidiarywithcurrentassetsinexcessofcurrentliabilitieswillcauseatranslationgain(loss)ifthelocalcurrencydepreciates(appreciates).d)Bothb)andc)Answer:a)Monetary/NonmonetaryMethod11Theunderlyingprincipleofthemonetary/nonmonetarymethodisa)Assetsandliabilitiesshouldbetranslatedbasedontheirmaturityb)Monetarybalancesheetaccountsshouldbetranslatedatthespotrate;nonmonetaryaccountsaretranslatedatthehistoricalrateineffectwhentheaccountwasfirstrecordedc)Monetaryaccountsaretranslatedatthecurrentexchangerate;otheraccountsaretranslatedatthecurrentexchangerateiftheyarecarriedonthebooksatcurrentvalue;itemscarriedathistoricalcostaretranslatedathistoricexchangerates.d)Allbalancesheetaccountsaretranslatedatthecurrentexchangerate,exceptstockholderequityAnswer:b)12Incomparisontothecurrent/noncurrentmethod,themonetary/nonmonetarymethoda)Differssubstantiallywithregardtothetreatmentofinventory.b)Classifiesaccountsonthebasisofsimilarityofattributesratherthanthesimilarityofmaturities.c)a)andb)d)NoneoftheaboveAnswer:c)TemporalMethod13Usingthetemporalmethod