Management of Translation

Sanjay.S.Parmar
Roll. no -25
 Answer the following question in one line.

1. What is direct exposure & indirect exposure?

2.
3. What is foreign exchange risk or exposure?
4.
5. State types of foreign exchange risks or exposures?
6.
7. What is historical exchange rates?
8.
9. What is Translation exposure?
10.
11.State different types of Translation methods ?
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 INTRODUCTION

• With the advent of floating exchange rate in 1973, fluctuations

in exchange rates have created foreign exposure.
•
• Firms which have cross border transaction such as exports,
imports, foreign investment, foreign borrowings and lending
have a direct exposure
•
• Firms have no cross border transactions are likely to have
indirect exposure as their customer, suppliers and
competitor may be exposed
 TYPES OF FOREIGN EXCHANGE RISKS
OR EXPOSURES

• The term exposure refers to the degree to which a company is

affected by exchange rate changes.
•
• There are two types of foreign exchange risks or exposures


1. Economic exposure: - refers to the risks arising from economic

factors through economic transactions and other economic
activities.
 The economic exposure may be divided into its two component
parts
– Transaction exposure
– Operating exposure
 Cont...
 2. Translation Exposure: -Translation exposure, (also called
accounting exposure), results from the need to restate foreign
subsidiaries’ financial statements, usually stated in foreign currency,
into the parent’s reporting currency when preparing the consolidated
financial statements.


• Restating financial statements may lead to changes in the parent’s

net worth or net income.
•
•
• Companies with the international operations will have foreign-
currency-denominations assets and liabilities revenue and
expenses, home country investors and the financial community
are interested in home-currency values, therefore foreign
currency balance sheet accounts and income statement must be
assigned in home country values


•
 Translation methods

1. Current/Noncurrent Method
2.
3. Monetary/Nonmonetary Method
4.
5. Temporal Method
6.
7. Current Rate Method
•
 1. Current/Noncurrent Method: -

• All the assets and liabilities of the foreign operation are translated into the home
currency at current exchange rate
•
• In case of noncurrent assets and liabilities are converted at historical exchange
rates (rate in effect at the time the assets or liability was first recorded on the
books)
•
• Profit and loss is translated at average exchange rate except for items like
depreciation and amortization


• Foreign subsidiary with current assets in excess of current liabilities will cause a
translation gain (loss) if the local currency appreciates (depreciates)
Example
Cont…..
 2. Monetary/Nonmonetary Method

• All monetary balance sheet items (such as cash, marketable

securities, accounts payable and receivable, and long term
debt) of a foreign subsidiary are translated at the current
exchange rate.
•
• All nonmonetary balance sheet items (such as inventory, fixed
assets and long-term investments) are translated at the
historical exchange
•
• Profit and loss is translated at average exchange rate; costs of
goods sold and depreciation are translated at the same rate as
the corresponding balance sheets items.
•
 3. Temporal Method

• Modified version of the Monetary/Nonmonetary Method



• Monetary items is translated at the current exchange rate.

•
• Other balance sheet item are translated at the current rate, if they
are carried at current value and, if they are translated at the
historical rate, if they are carried at historical cost.
•
• Profit and loss is normally translated at average exchange rate,
costs of goods sold and depreciation are translated at the same
rate as the corresponding balance sheets items
 4. Current Rate Method

•
• Simplest of all translation methods
•
• All the assets and liabilities and profit and loss accounts are
translated at the current exchange rate
•
• This is simplest methods to apply .