国际财务管理系统课后习题问题详解chapter10.docx

国际财务管理系统课后习题问题详解chapter10.docx

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国际财务管理系统课后习题问题详解chapter10

CHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURE

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nonmonetarymethodandthetemporalmethod.

Answer:

Underthemonetary/nonmonetarymethod,allmonetarybalancesheetaccountsofaforeignsubsidiaryaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsaretranslatedatthehistoricalrateexchangerateineffectwhentheaccountwasfirstrecorded.Underthetemporalmethod,monetaryaccountsaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsarealsotranslatedatthecurrentrate,iftheyarecarriedonthebooksatcurrentvalue.Iftheyarecarriedathistoricalvalue,theyaretranslatedattherateineffectonthedatetheitemwasputonthebooks.Sincefixedassetsandinventoryareusuallycarriedathistoricalcosts,thetemporalmethodandthemonetary/nonmonetarymethodwilltypicallyprovidethesametranslation.

2.Howaretranslationgainsandlosseshandleddifferentlyaccordingtothecurrentratemethodincomparisontotheotherthreemethods,thatis,thecurrent/noncurrentmethod,themonetary/nonmonetarymethod,andthetemporalmethod?

Answer:

Underthecurrentratemethod,translationgainsandlossesarehandledonlyasanadjustmenttonetworththroughanequityaccountnamedthe“cumulativetranslationadjustment”account.Nothingpassesthroughtheincomestatement.Theotherthreetranslationmethodspassforeignexchangegainsorlossesthroughtheincomestatementbeforetheyenterontothebalancesheetthroughtheaccumulatedretainedearningsaccount.

3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfunctionalcurrencywouldbethesameastheparentfirm’scurrency.

Answer:

ThreeexamplesunderFASB52,wheretheforeignentity’sfunctionalcurrencywillbethesameastheparentfirm’scurrency,are:

i）theforeignentity’scashflowsdirectlyaffecttheparent’scashflowsandarereadilyavailableforremittancetotheparentfirm;ii）thesalespricesfortheforeignentity’sproductsareresponsiveonashort-termbasistoexchangeratechanges,wheresalespricesaredeterminedthroughworldwidecompetition;and,iii）thesalesmarketisprimarilylocatedintheparent’scountryorsalescontractsaredenominatedintheparent’scurrency.

4.DescribetheremeasurementandtranslationprocessunderFASB52ofawhollyownedaffiliatethatkeepsitsbooksinthelocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanitsfunctionalcurrency.

Answer:

Foraforeignentitythatkeepsitsbooksinitslocalcurrency,whichisdifferentfromitsfunctionalcurrency,thetranslationprocessaccordingtoFASB52isto:

first,remeasurethefinancialreportsfromthelocalcurrencyintothefunctionalcurrencyusingthetemporalmethodoftranslation,andsecond,translatefromthefunctionalcurrencyintothereportingcurrencyusingthecurrentratemethodoftranslation.

5.Itis,generally,notpossibletocompletelyeliminatebothtranslationexposureandtransactionexposure.Insomecases,theeliminationofoneexposurewillalsoeliminatetheother.Butinothercases,theeliminationofoneexposureactuallycreatestheother.Discusswhichexposuremightbeviewedasthemostimportanttoeffectivelymanage,ifaconflictbetweencontrollingbotharises.Also,discussandcritiquethecommonmethodsforcontrollingtranslationexposure.

Answer:

Sinceitis,generally,notpossibletocompletelyeliminatebothtransactionandtranslationexposure,werecommendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslationprocess,on-the-otherhand,hasnodirecteffectonreportingcurrencycashflows,andwillonlyhavearealizableeffectonnetinvestmentuponthesaleorliquidationoftheassets.

Therearetwocommonmethodsforcontrollingtranslationexposure:

abalancesheethedgeandaderivativeshedge.Thebalancesheethedgeinvolvesequatingtheamountofexposedassetsinanexposurecurrencywiththeexposedliabilitiesinthatcurrency,sothenetexposureiszero.Thuswhenanexposurecurrencyexchangeratechangesversusthereportingcurrency,thechangeinassetswilloffsetthechangeinliabilities.Tocreateabalancesheethedge,oncetransactionexposurehasbeencontrolled,oftenmeanscreatingnewtransactionexposure.Thisisnotwisesincerealcashflowlossescanresult.Aderivativeshedgeisnotreallyahedge,butratheraspeculativeposition,sincethesizeofthe“hedge”isbasedonthefutureexpectedspotrateofexchangefortheexposurecurrencywiththereportingcurrency.Iftheactualspotratediffersfromtheexpectedrate,the“hedge”mayresultinthelossofrealcashflows.

PROBLEMS

1.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructatranslationexposurereportforCentraliaCorporationanditsaffiliatesthatisthecounterparttoExhibit10.7inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.

Solution:

ThefollowingtableprovidesatranslationexposurereportforCentraliaCorporationanditsaffiliatesunderFASB8,whichisessentiallythetemporalmethodoftranslation.ThedifferencebetweenthenewreportandExhibit10.7isthatnonmonetaryaccountssuchasinventoryandfixedassetsaretranslatedatthehistoricalexchangerateiftheyarecarriedathistoricalcosts.Thus,theseaccountswillnotchangevalueswhenexchangerateschangeandtheydonotcreatetranslationexposure.

ExaminationofthetableindicatesthatunderFASB8thereisnegativenetexposurefortheMexicanpesoandtheeuro,whereasunderFASB52thenetexposureforthesecurrenciesispositive.ThereisnochangeinnetexposurefortheCanadiandollarandtheSwissfranc.Consequently,iftheeurodepreciatesagainstthedollarfrom€1.1000/$1.00to€1.1786/$1.00,asthetextexampleassumed,exposedassetswillnowfallinvaluebyasmalleramountthanexposedliabilities,insteadofviceversa.Theassociatedreportingcurrencyimbalancewillbe$239,415,calculatedasfollows:

ReportingCurrencyImbalance=

TranslationExposureReportunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005（in000CurrencyUnits）

Canadian

Dollar

Mexican

Peso

Euro

Swiss

Franc

Assets

Cash

CD200

Ps6,000

€825

SF0

Accountsreceivable

0

9,000

1,045

0

Inventory

0

0

0

0

Netfixedassets

0

0

0

0

Exposedassets

CD200

Ps15,000

€1,870

SF0

Liabilities

Accountspayable

CD0

Ps7,000

€1,364

SF0

Notespayable

0

17,000

935

1,400

Long-termdebt

0

27,000

3,520

0

Exposedliabilities

CD0

Ps51,000

€5,819

SF1,400

Netexposure

CD200

（Ps36,000）

（€3,949）

（SF1,400）

2.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructaconsolidatedbalancesheetforCentraliaCorporationanditsaffiliatesafteradepreciationoftheeurofrom€1.1000/$1.00to€1.1786/$1.00thatisthecounterparttoExhibit10.8inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.

Solution:

ThisproblemisthesequeltoProblem1.ThesolutiontoProblem1showedthatiftheeurodepreciatedtherewouldbeareportingcurrencyimbalanceof$239,415.UnderFASB8thisiscarriedthroughtheincomestatementasaforeignexchangegaintotheretainedearningsonthebalancesheet.Thefollowingtableshowsthatconsolidatedretainedearningsincreasedto$4,190,000from$3,950,000inExhibit10.8.Thisisanincreaseof$240,000,whichisthesameasthereportingcurrencyimbalanceafteraccountingforroundingerror.

ConsolidatedBalanceSheetunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005:

Post-ExchangeRateChange（in000Dollars）

CentraliaCorp.

（parent）

Mexican

Affiliate

Spanish

Affiliate

ConsolidatedBalanceSheet

Assets

Cash

$950a

$600

$700

$2,250

Accountsreceivable

1,450b

900

887

3,237

Inventory

3,000

1,500

1,500

6,000

InvestmentinMexicanaffiliate

-c

-

-

-

InvestmentinSpanishaffiliate

-d

-

-

-

Netfixedassets

9,000

4,600

4,000

17,600

Totalassets

$29,087

LiabilitiesandNetWorth

Accountspayable

$1,800

$700b

$1,157

$3,657

Notespayable

2,200

1,700

1,043e

4,943

Long-termdebt

7,110

2,700

2,987

12,797

Commonstock

3,500

-c

-d

3,500

Retainedearnings

4,190

-c

-d

4,190

Totalliabilitiesandnetworth

$29,087

aThisincludesCD200,000theparentfirmhasinaCanadianbank,carriedas$150,000.CD200,000/（CD1.3333/$1.00）=$150,000.

b$1,750,000-$300,000（=Ps3,000,000/（Ps10.00/$1.00））intracompanyloan=$1,450,000.

c,dInvestmentinaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation.

eTheSpanishaffiliateowesaSwissbankSF375,000（÷SF1.2727/€1.00=€294,649）.Thisiscarriedonthebooks,

aftertheexchangeratechange,aspartof€1,229,649=€294,649+€935,000.€1,229,649/（€1.1786/$1.00）=$1,043,313.

3.InExample10.2,aforwardcontractwasusedtoestablishaderivatives“hedge”toprotectCentraliafromatranslationlossiftheeurodepreciatedfrom€1.1000/$1.00to€1.1786/$1.00.Assumethatanover-the-counterputoptionontheeurowithastrikepriceof€1.1393/$1.00（or$0.8777/€1.00）canbepurchasedfor$0.0088pereuro.Showhowthepotentialtranslationlosscanbe“hedged”withanoptioncontract.

Solution:

Asinexample10.2,ifthepotentialtranslationlossis$110,704,theequivalentam