国际会计第七版英文版课后答案第六章.docx

1、国际会计第七版英文版课后答案第六章Chapter 6Foreign Currency TranslationDiscussion Questions Solutions 1.Foreign currency translation is the process of restating a foreign account balance from one currency to another. Foreign currency conversion is the process of physically exchanging one currency for another. 2.In t

2、he foreign exchange spot market, currencies bought and sold must be delivered immediately, normally within 2 business days. Thus a Singaporean tourist buying U.S. dollars at the airport before boarding a plane for New York would hand over Singapore dollars and immediately receive the equivalent amou

3、nt in U.S. dollars. The forward market handles agreements to exchange a fixed amount of one currency for another on an agreed date in the future. For example, a French manufacturer exporting goods invoiced in euros to a Japanese importer on 60- day credit terms would buy a forward contract to sell y

4、en for euros 2 months in the future. Transactions in the swap market involve the simultaneous purchase (or sale) of one currency in the spot market and the sale (or purchase) of the same currency in the forward market. Thus, a Canadian investor wishing to take advantage of higher interest rates on 6

5、-month Treasury bills in the United States would buy U.S. dollars with Canadian dollars in the spot market and invest in the United States. To guard against a fall in the value of the U.S. dollar before maturity (when the U.S. dollar proceeds are converted back to Canadian dollars), the Canadian inv

6、estor would simultaneously enter into a forward contract to sell U.S. dollars for Canadian dollars 6 months in the future at today s forward exchange rate.3.The question refers to alternative exchange rates that are used to translate foreign financial statements. The current rate is the exchange rat

7、e at the financial statement date. It is sometimes called the year-end or closing rate. The historical rate is the exchange rate at the time of the underlying transaction. The average rate is the average of various exchange rates during a fiscal period. Since the average rate normally is used to tra

8、nslate income statement items, it is often weighted to reflect any seasonal changes in the volume of transactions during the period. Translation gains and losses do not occur if exchange rates do not change. However, if exchange rates change, the use of current and average rates causes translation g

9、ains and losses. These do not occur when the historical rate is used because the same (constant) rate is used each period. 4. In this example, the Mexican Affiliate s Canadian dollar loan is denominated in Canadian dollars. However, because the Mexican affiliates functional currency is U.S. dollars,

10、 the peso equivalent of the Canadian dollar borrowing would be remeasured in U.S. dollars prior to consolidation. If the Mexican affiliates functional currency were the peso, the Canadian dollar loan would be remeasured in pesos before being translated to U.S. dollars. 5. A transaction gain or loss

11、occurs when a foreign currency transaction, e.g., a foreign currency borrowing, is settled at a different exchange rate than that which prevailed when the transaction was originally incurred. In this case there is an exchange of one currency for another. A translation gain or loss, on the other hand

12、, is simply the result of a restatement process. There is no physical exchange of currencies involved. 6. It is not possible to combine, add, or subtract accounting measurements expressed in different currencies; thus, it is necessary to translate those accounts that are measured or denominated in a

13、 foreign currency into a single reporting currency. Foreign currency translation can involve restatement or remeasurement. In restatement, the local (functional) currency is kept as the unit of measure; that is, the translation process multiplies the financial results and relationships in the local

14、currency accounts by a constant, the current rate. In contrast, remeasurement translates local currency results as if the underlying transactions had taken place in the reporting (functional) currency of the parent company; for example, it changes the unit of measure of a foreign subsidiary from its

15、 local (foreign) currency to the U.S. dollar. 7. Major advantages and limitations of each of the major translation methods follow.Current Rate MethodAdvantages:a. Retains the initial relationships in the foreign currency statements.b. Simple to apply.Limitations:a. Violates the basic purpose of cons

16、olidation, which is to present the results of a parent and its subsidiaries as if they were a single entity.b. Inconsistent with historical cost.c. Presumes that all local assets and liabilities are subject to exchange risk.d. While stockholders equity adjustments shield an MNC s bottom line from tr

17、anslation gains and losses, such adjustments could distort certain financial ratios and be confusing.Current-noncurrent MethodAdvantages:a. Distortions in translated gross margins are reduced as inventories and translated at the current rate.b. Reported earnings are shielded from the distorting effe

18、cts of currency fluctuations as excess translation gains are deferred and used to offset future translation losses.Limitations:a. Uses balance sheet classification as basis for translation.b. Assumes all current assets are exposed to exchange risk regardless of their form.c. Assumes long-term debt i

19、s sheltered from exchange rate risk.Monetary-nonmonetary MethodAdvantages:a. Reflects changes in domestic currency equivalent of long-term debt on a timely basis.Limitations:a. Assumes that only monetary assets and liabilities are subject to exchange rate risk.b. Exchange rate changes distort profit

20、 margins as sales transacted at current prices are matched against cost of sales measured at historical prices.c. Uses balance sheet classification as basis for translation.d. Nonmonetary items stated at current market values are translated at historical rates.Temporal MethodAdvantages:a. Theoretica

21、lly valid: compatible with any accounting measurement method.b. Has the effect of translating foreign subsidiaries operations as if they were originally transacted in the home currency, which is desirable for foreign operations that are extensions of the parents activities.Limitation:a. A company in

22、creases its earnings volatility by recognizing translation gains and losses currently.In arguing for one translation method over another, your students should eventually realize that, in the present state of the art, there is probably no one translation method that is appropriate for all circumstanc

23、es in which translations occur and for all purposes thattranslation serves. It is probably more fruitful to have students identify circumstances in which they think one translation method is more appropriate than another.8.The current rate method is appropriate when the foreign entity being consolid

24、ated is largely independent of the parent company. Conditions which would justify this methodology is when the foreign affiliate tends to generate and expend cash flows in the local currency, sells a product locally so that its selling price is largely insulated from exchange rate changes, incurs ex

25、penses locally, finances its self locally and does not have very many transactions with the parent company. In contrast, the temporal method seems appropriate in those instances when the foreign affiliates operations are integrally related to the parent company. Conditions which would justify use of

26、 the temporal method are when the foreign affiliate transacts business in the parent currency and remits such cash flows to the parent company, sells a product largely in the parent country and whose selling price is sensitive to exchange rate changes, sources its factor inputs from the parent compa

27、ny, receives most of its financing from the parent and has a large two way flow of transactions with it. oreign Currency Translationlow up and let you know as soon as I know.n do for you please do not hesitate to let me know.l vers9.The history of foreign currency translation in the United States su

28、ggests that the development of accounting principles does not depend on theoretical considerations so much as on political, institutional, and economic influences that affect accounting standard setting. It may be more realistic to recognize that theoretically sound solutions are impossible as long

29、as policy prescriptions are evaluated on practical grounds. Without specific choice criteria derived from investor decision models, it is fruitless to argue the conceptual merits of competing accounting treatments. It is far more productive to admit that foreign currency translation choices are simp

30、ly arbitrary. Readers of consolidated financial statements should know that the foreign currency translation method used is one of several alternatives, and this should be disclosed. This approach is more open and reduces the chance that readers will draw misleading inferences.8. al statement date.

31、10.Foreign inflation, in particular, the differential rate of inflation between the country in which a subsidiary is located and the country of its parent determines foreign exchange rates. These rates, in turn, are used to translate foreign currency balances to parent currency. 11.In the United Kin

32、gdom, financial statements of affiliates domiciled in hyperinflationary environments must first be adjusted to current price levels and then translated using the current rate; in the United States, the temporal method would be employed. The second part of this question is designed to get students from abroad to find out what companies in their home countries are doing and thereby be in a position to share their new found knowledge with thei