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CHAPTER 7:
TRANSLATION OF FOREIGN
CURRENCY FINANCIAL
STATEMENTS
Hanoi, 2020
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CHAPTER TOPICS
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LEARNING OBJECTIVES
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TRANSLATION METHODS
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TRANSLATION METHODS
I. Current/Noncurrent Method
Current assets and liabilities are translated at the
current exchange rate
Noncurrent assets and liabilities and stockholders’
equity accounts are translated at historical exchange
rates
There is no theoretical basis for this method
Method is seldom used in any countries and is not
allowed by U.S. GAAP or IFRS
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TRANSLATION METHODS
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TRANSLATION METHODS
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TRANSLATION METHODS
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Exchange Rates Used under the Current Rate
Method and the Temporal Method for Selected
Financial Statement Items
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Exchange Rates Used under the Current Rate
Method and the Temporal Method for Selected
Financial Statement Items
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COMPLICATING ASPECTS OF THE
TEMPORAL METHOD
• Keeping track of the historical rates for inventory, prepaid
expenses, fixed assets, and intangible assets is necessary
under temporal method and not under current rate method
Translating these assets at historical rates makes
application of the temporal method more complicated than
the current rate method
Calculation of Cost of Goods Sold (COGS)
Fixed Assets, Depreciation, Accumulated
Depreciation
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COMPLICATING ASPECTS OF THE
TEMPORAL METHOD
• Calculation of Cost of Goods Sold (COGS)
- Under Current rate method:
COGS in FC x Average ER = COGS in PC
- Under temporal method:
COGS in PC = Beginning in inventory in PC (1) + Purchases
in PC (2) – Ending in inventory in PC (3)
(1) Beginning inventory in FC x Historical ER (e.g. 1 st
QuarterYear 1) = Beginning in inventory in PC
(2) Purchases in FC x Average ER, Year 2 = Purchases in PC
(3) Ending in inventory in PC = Ending in inventory in FC x
Historical ER (e.g. 4th Quarter Year 2)
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Example
In FC
• Jan 1, 2010. Inventory : 600,000
• Purchase in 2010: 6,200,000
• Dec 31, 2010. Inventory: 800,000
• Rate:
Jan 1, 2010 : r=$1.00
Average of 2010: r = 0.95
Average of December, 2010: r = 0.91
Dec 31, 2010: 0.90
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COMPLICATING ASPECTS OF THE
TEMPORAL METHOD
Fixed Assets, Depreciation, Accumulated Depreciation
• Under the temporal method
The fixed assets, accumulated depreciation acquired at
different times must be translated at different (historical)
exchange rates.
• Under current rate method
The fixed assets, accumulated depreciation acquired at
different times must be translated at current exchange rate.
Example?
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EXAMPLE
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DISPOSITION OF TRANSLATION
ADJUSTMENT
• Translation gain or loss in net income
– Translation adjustment is considered to be a gain or loss
analogous to the gains and losses arise from foreign
currency transaction
– Should be reported in income in the period in which the
fluctuation in exchange rate occurs
• Cumulative translation adjustment in stockholders’ equity
– The alternative to reporting the translation adjustment as a
gain or loss in net income is to include it in stockholders’
equity as a component of other comprehensive income
– This treatment defers the gain or loss in stockholders’ equity
until it is realized in some way
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Comparison of the results from applying the
two different methods
• The use of different translation methods can have a
significant impact on consolidated financial Statements
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U.S. GAAP
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IFRS
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IFRS REQUIREMENTS
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End of Chapter 7
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