国际会计第七版英文版课后答案第六章.docx

国际会计第七版英文版课后答案第六章.docx

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国际会计第七版英文版课后答案第六章

Chapter6

ForeignCurrencyTranslation

DiscussionQuestionsSolutions

1.Foreigncurrencytranslationistheprocessofrestatingaforeignaccountbalancefromone

currencytoanother.Foreigncurrencyconversionistheprocessofphysicallyexchangingonecurrencyforanother.

2.Intheforeignexchangespotmarket,currenciesboughtandsoldmustbedeliveredimmediately,

normallywithin2businessdays.ThusaSingaporeantouristbuyingU.S.dollarsattheairport

beforeboardingaplaneforNewYorkwouldhandoverSingaporedollarsandimmediately

receivetheequivalentamountinU.S.dollars.Theforwardmarkethandlesagreementsto

exchangeafixedamountofonecurrencyforanotheronanagreeddateinthefuture.For

example,aFrenchmanufacturerexportinggoodsinvoicedineurostoaJapaneseimporteron60-

daycredittermswouldbuyaforwardcontracttosellyenforeuros2monthsinthefuture.

Transactionsintheswapmarketinvolvethesimultaneouspurchase（orsale）ofonecurrencyin

thespotmarketandthesale（orpurchase）ofthesamecurrencyintheforwardmarket.Thus,a

Canadianinvestorwishingtotakeadvantageofhigherinterestrateson6-monthTreasurybillsin

theUnitedStateswouldbuyU.S.dollarswithCanadiandollarsinthespotmarketandinvestin

theUnitedStates.ToguardagainstafallinthevalueoftheU.S.dollarbeforematurity（when

theU.S.dollarproceedsareconvertedbacktoCanadiandollars）,theCanadianinvestorwould

simultaneouslyenterintoaforwardcontracttosellU.S.dollarsforCanadiandollars6monthsin

thefutureattodaysforwardexchangerate.

3.Thequestionreferstoalternativeexchangeratesthatareusedtotranslateforeignfinancial

statements.Thecurrentrateistheexchangerateatthefinancialstatementdate.Itis

sometimescalledtheyear-endorclosingrate.Thehistoricalrateistheexchangerateatthetime

oftheunderlyingtransaction.Theaveragerateistheaverageofvariousexchangeratesduringa

fiscalperiod.Sincetheaverageratenormallyisusedtotranslateincomestatementitems,itis

oftenweightedtoreflectanyseasonalchangesinthevolumeoftransactionsduringtheperiod.

Translationgainsandlossesdonotoccurifexchangeratesdonotchange.However,if

exchangerateschange,theuseofcurrentandaverageratescausestranslationgainsandlosses.

Thesedonotoccurwhenthehistoricalrateisusedbecausethesame（constant）rateisusedeach

period.

4.Inthisexample,theMexicanAffiliatesCanadiandollarloanisdenominatedinCanadiandollars.

However,becausetheMexicanaffiliate’sfunctionalcurrencyisU.S.dollars,thepesoequivalent

oftheCanadiandollarborrowingwouldberemeasuredinU.S.dollarspriortoconsolidation.If

theMexicanaffiliate’sfunctionalcurrencywerethepeso,theCanadiandollarloanwouldbe

remeasuredinpesosbeforebeingtranslatedtoU.S.dollars.

5.Atransactiongainorlossoccurswhenaforeigncurrencytransaction,e.g.,aforeigncurrency

borrowing,issettledatadifferentexchangeratethanthatwhichprevailedwhenthetransaction

wasoriginallyincurred.Inthiscasethereisanexchangeofonecurrencyforanother.A

translationgainorloss,ontheotherhand,issimplytheresultofarestatementprocess.Thereis

nophysicalexchangeofcurrenciesinvolved.

6.Itisnotpossibletocombine,add,orsubtractaccountingmeasurementsexpressedindifferent

currencies;thus,itisnecessarytotranslatethoseaccountsthataremeasuredordenominatedina

foreigncurrencyintoasinglereportingcurrency.Foreigncurrencytranslationcaninvolve

restatementorremeasurement.Inrestatement,thelocal（functional）currencyiskeptastheunit

ofmeasure;thatis,thetranslationprocessmultipliesthefinancialresultsandrelationshipsinthe

localcurrencyaccountsbyaconstant,thecurrentrate.Incontrast,remeasurementtranslates

localcurrencyresultsasiftheunderlyingtransactionshadtakenplaceinthereporting

（functional）currencyoftheparentcompany;forexample,itchangestheunitofmeasureofa

foreignsubsidiaryfromitslocal（foreign）currencytotheU.S.dollar.

7.Majoradvantagesandlimitationsofeachofthemajortranslationmethodsfollow.

CurrentRateMethod

Advantages:

a.Retainstheinitialrelationshipsintheforeigncurrencystatements.

b.Simpletoapply.

Limitations:

a.Violatesthebasicpurposeofconsolidation,whichistopresenttheresultsofaparentanditssubsidiariesasiftheywereasingleentity.

b.Inconsistentwithhistoricalcost.

c.Presumesthatalllocalassetsandliabilitiesaresubjecttoexchangerisk.

d.WhilestockholdersequityadjustmentsshieldanMNCsbottomlinefromtranslationgainsandlosses,suchadjustmentscoulddistortcertainfinancialratiosandbeconfusing.

Current-noncurrentMethod

Advantages:

a.Distortionsintranslatedgrossmarginsarereducedasinventoriesandtranslatedatthecurrentrate.

b.Reportedearningsareshieldedfromthedistortingeffectsofcurrencyfluctuationsasexcesstranslationgainsaredeferredandusedtooffsetfuturetranslationlosses.

Limitations:

a.Usesbalancesheetclassificationasbasisfortranslation.

b.Assumesallcurrentassetsareexposedtoexchangeriskregardlessoftheirform.

c.Assumeslong-termdebtisshelteredfromexchangeraterisk.

Monetary-nonmonetaryMethod

Advantages:

a.Reflectschangesindomesticcurrencyequivalentoflong-termdebtonatimelybasis.

Limitations:

a.Assumesthatonlymonetaryassetsandliabilitiesaresubjecttoexchangeraterisk.

b.Exchangeratechangesdistortprofitmarginsassalestransactedatcurrentpricesarematchedagainstcostofsalesmeasuredathistoricalprices.

c.Usesbalancesheetclassificationasbasisfortranslation.

d.Nonmonetaryitemsstatedatcurrentmarketvaluesaretranslatedathistoricalrates.

TemporalMethod

Advantages:

a.Theoreticallyvalid:

compatiblewithanyaccountingmeasurementmethod.

b.Hastheeffectoftranslatingforeignsubsidiariesoperationsasiftheywereoriginallytransactedinthehomecurrency,whichisdesirableforforeignoperationsthatareextensionsoftheparent’sactivities.

Limitation:

a.Acompanyincreasesitsearningsvolatilitybyrecognizingtranslationgainsandlossescurrently.

Inarguingforonetranslationmethodoveranother,yourstudentsshouldeventuallyrealizethat,inthepresentstateoftheart,thereisprobablynoonetranslationmethodthatisappropriateforallcircumstancesinwhichtranslationsoccurandforallpurposesthat

translationserves.Itisprobablymorefruitfultohavestudentsidentifycircumstancesinwhichtheythinkonetranslationmethodismoreappropriatethananother.

8.Thecurrentratemethodisappropriatewhentheforeignentitybeingconsolidatedislargelyindependentoftheparentcompany.Conditionswhichwouldjustifythismethodologyiswhentheforeignaffiliatetendstogenerateandexpendcashflowsinthelocalcurrency,sellsaproductlocallysothatitssellingpriceislargelyinsulatedfromexchangeratechanges,incursexpenseslocally,financesitsselflocallyanddoesnothaveverymanytransactionswiththeparentcompany.Incontrast,thetemporalmethodseemsappropriateinthoseinstanceswhentheforeignaffiliate’soperationsareintegrallyrelatedtotheparentcompany.Conditionswhichwouldjustifyuseofthetemporalmethodarewhentheforeignaffiliatetransactsbusinessintheparentcurrencyandremitssuchcashflowstotheparentcompany,sellsaproductlargelyintheparentcountryandwhosesellingpriceissensitivetoexchangeratechanges,sourcesitsfactorinputsfromtheparentcompany,receivesmostofitsfinancingfromtheparentandhasalargetwowayflowoftransactionswithit.

oreignCurrencyTranslationlowupandletyouknowassoonasIknow.ndoforyoupleasedonothesitatetoletmeknow.lvers

9.ThehistoryofforeigncurrencytranslationintheUnitedStatessuggeststhatthedevelopmentof

accountingprinciplesdoesnotdependontheoreticalconsiderationssomuchasonpolitical,

institutional,andeconomicinfluencesthataffectaccountingstandardsetting.Itmaybemore

realistictorecognizethattheoreticallysoundsolutionsareimpossibleaslongaspolicy

prescriptionsareevaluatedonpracticalgrounds.Withoutspecificchoicecriteriaderivedfrom

investordecisionmodels,itisfruitlesstoarguetheconceptualmeritsofcompetingaccounting

treatments.Itisfarmoreproductivetoadmitthatforeigncurrencytranslationchoicesaresimply

arbitrary.

Readersofconsolidatedfinancialstatementsshouldknowthattheforeigncurrencytranslation

methodusedisoneofseveralalternatives,andthisshouldbedisclosed.Thisapproachismore

openandreducesthechancethatreaderswilldrawmisleadinginferences.

8.alstatementdate.

10.Foreigninflation,inparticular,thedifferentialrateofinflationbetweenthecountryinwhichasubsidiaryislocatedandthecountryofitsparentdeterminesforeignexchangerates.Theserates,inturn,areusedtotranslateforeigncurrencybalancestoparentcurrency.

11.IntheUnitedKingdom,financialstatementsofaffiliatesdomiciledinhyperinflationaryenvironmentsmustfirstbeadjustedtocurrentpricelevelsandthentranslatedusingthecurrentrate;intheUnitedStates,thetemporalmethodwouldbeemployed.Thesecondpartofthisquestionisdesignedtogetstudentsfromabroadtofindoutwhatcompaniesintheirhomecountriesaredoingandtherebybeinapositiontosharetheirnewfoundknowledgewiththei