CHAPTER 15

TRANSLATING FOREIGN

STATEMENTS:

THE CURRENT RATE METHOD

FOCUS OF CHAPTER 15

• The Way to Restate to U.S. GAAP• Conceptual Issues in Translating Foreign

Currency Statements to U.S. Dollars• The Current Rate Method of Translation• Reporting the Effects of Exchange Rate

Changes in a Statement of Comprehensive Income

Restating To U.S. GAAP: Only Oranges Make Orange Juice

• Not restating to U.S. GAAP would be mixing apples and oranges together.

Restating to U.S. GAAP: To Be Done BEFORE Translation—NOT AFTER

• Restating Per Se = No controversy– All agree that it must be done.

• Restating BEFORE Translating – Almost all agree that this is the way to

go.• Restating AFTER Translating

– Very few believe that this is the way to go.

Restating to U.S. GAAP: Is It Easy or Hard?

• Difficulty of Restating to U.S. GAAP: – A “right-to-work law” for accountants. – Often a major task—sometimes 50 +

adjusting entries are needed. (May have to work “until the cows come home.”)

– Most U.S. companies have their foreign units restate to U.S. GAAP before submitting their financial statements.

Restating To U.S. GAAP: Is It Easier or Harder Than Translating

• Translating Foreign Currency Statements Into U.S. Dollars:– Translating is usually much much

easier than restating to U.S. GAAP.– In most cases, the translation

process is automatically done using specialized software programs.

Restating To U.S. GAAP: Comparing “WWD” With “WWWHBD”

Step 1: List account balances using WWD (“what was done”)—the FOREIGN GAAP amounts.

Step 2: Determine the account balances using WWWHBD (“what we wish had been done”)—the U.S. GAAP amounts.

Step 3: Compare amounts in steps 1 and 2—the differences make up the entry to restate to U.S. GAAP.

The Current Rate Method:It’s As Easy As Pie

• Merely translate ALL assets, liabilities, revenues, expenses, gains, and losses at the current rate.

• Translate equity accounts as follows:– Common Stock and APIC: Use

historical exchange rates.– Retained Earnings—B-O-Y: Use prior

period ending translated amount.

The Current Rate Method: The Definition of the Current Rate

• You won’t find the definition in the dictionary.

• Furthermore, the FASB has a dual definition.

The Current Rate Method: The Current Rate’s Defining Moment

• It all depends on whether you are talking about the balance sheet or the income statement:– Balance sheet—”the spot rate at that

date.”– Income statement—”the rate existing

when the item was recognized.”• Could be 365 (or 366) current rates.• Usually twelve monthly rates are used.

The Current Rate Method: What’s Relevant and What’s NOT

• What is relevant?– Maintaining the account item relationships

that exist in the foreign currency statements.

• What’s is not relevant?– How it is valued (cost, LCM, NRV, FMV).– Whether it is current or noncurrent (in

B/S).– Whether it is monetary or nonmonetary.

The Current Rate Method: Is Maintaining Relationships Good?

• Only If It Results in Reflecting the True Economic Reality that Exists 2 + 2 = 4

• This does NOT always occur. 2 + 2 = 7

The Current Rate Method: What Winds Up Being the Focus?

• The result of applying the current rate method generally enables one to view the method as a focus on the net asset position: – Assets > Liabilities =

A net asset position.

– Assets < Liabilities = A net liability position.

[Equals the parent’s investment]

The Current Rate Method: Fixed Assets Can Go on Quite a Ride

• In U.S. dollars, a foreign unit’s fixed assets can be reported at wildly different amounts each year.

The Current Rate Method: What Is The True Historical Cost In U.S. Dollars?

Assumptions: Foreign unit buys land on 1/1/06 when thedirect exchange rate is $1.00. Foreign country has 25% inflation in 2006. Exchange rate at 12/31/06 is $.80—the$.20 decrease is due entirely to the foreign inflation.

LCUs Exchange Rate U.S. Dollars I. 1,000 HC x $1.00 HR = $1,000

II. 1,000 HC x $ .80 CR = $ 800

III. 1,250 CV x $ .80 CR = $1,000

The Current Rate Method: The BIG QUESTION--What Is the $800?

LCUs Exchange Rate U.S. Dollars I. 1,000 HC x $1.00 HR = $1,000

II. 1,000 HC x $ .80 CR = $ 800

III. 1,250 CV x $ .80 CR = $1,000

Is the $800: 1. Historical cost 2. Current value

3. Neither

The Current Rate Method: Let’s Play “Hide and Seek”

• Where are the effects of exchange rate changes reported?”– You won’t find them reported in earnings.– You will find them reported in “Other

Comprehensive Income.” The 3 options are:• Expand the bottom of Income Statement.• Add a Statement of Comprehensive

Income.• Disclose in Statement of Changes in

Stockholders’ Equity.

#2

#3

#1

The Current Rate Method: Sometimes The FASB Is Not Consistent

• FASB says:– Whether FX gains & losses on foreign

currency transactions are unrealized is not relevant—MUST report currently in earnings.

– Whether the statement translation effects as a result of using the current rate method are unrealized is relevant—CANNOT report currently in earnings.

Review Question #1

Under the current rate method, which of the following accounts is NOT translated into dollars using the current exchange rate? A. Purchases. B. Cost of sales.C. Depreciation expense. D. Gain on equipment disposal. E. Retained earnings (ending balance).F. Flood loss—extraordinary item. G. None of the above.

Review Question #1With Answer

Under the current rate method, which of the following accounts is NOT translated into dollars using the current exchange rate? A. Purchases. B. Cost of sales. C. Depreciation expense. D. Gain on equipment disposal. E. Retained earnings (ending balance). F. Flood loss—extraordinary item. G. None of the above.

Review Question #2

Under the current rate method, which of the following accounts is NOT translated into dollars using the current exchange rate? A. Inventory (LIFO). B. Income tax expense.C. Goodwill expense. D. Deferred income taxes payable. E. Deferred charges.F. Bonds Payable (long-term).G. None of the above.

Review Question #2With Answer

Under the current rate method, which of the following accounts is NOT translated into dollars using the current exchange rate? A. Inventory (LIFO). B. Income tax expense.C. Goodwill expense. D. Deferred income taxes payable.E. Deferred charges.F. Bonds Payable (long-term).G. None of the above.

End of Chapter 15

• Time to Clear Things Up—Any Questions?