Page 185 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes 9. …………………… exposure is the potential for translation losses or gains.
10. …………………… currency is defined as the currency of the primary economic environment
in which the affiliate operates and in which it generates cash flows.

11. …………………… is the measurement, in a reporting currency, of assets, liabilities,
revenues, and expenses of a foreign operation where the foreign accounts are originally
denominated and/or measured in a functional currency that is also a foreign currency.

11.3 Comparison of Four Translational Methods

A comparison of the four translation methods is presented below:
1. Monetary/Non-monetary Method

All monetary balance sheet accounts (cash, marketable securities, accounts receivable,
etc.) of a foreign subsidiary are translated at the current exchange rate.
All other (non-monetary) balance sheet accounts (owners’ equity, land) are translated
at the historical exchange rate in effect when the account was first recorded.
2. Current-Non Current Method
All current assets and current liabilities of foreign affiliates are translated into the
parent currency at current exchange rates.
All noncurrent assets, noncurrent liabilities, and owner’s equity are translated at
historical exchange rates.

Most income statement items are related to current assets or liabilities and are
translated at the average exchange rate over the reporting period.

Depreciation is related to noncurrent assets and translated at the historical exchange
rate.
3. Temporal Method of FAS No 8

Monetary assets and monetary liabilities are translated at current exchange rates.
Monetary assets include cash, accounts receivables, and notes receivable. In general,
all liabilities are monetary.

Non monetary assets, non monetary liabilities, and owner’s equity are translated at
historical rates.
Non monetary assets include inventory and fixed assets.

Most Income statements items related to current items are translated at average ER.
Depreciation and cost of goods sold are related to real assets (Non monetary) and
are translated at historical ER.
4. The Current Rate Method of FAS no 52

All assets and liabilities except common equity are translated at the current exchange
rate.

Common equity is translated at historical exchange rates.
Income statement items are translated at a current exchange rate.
Any imbalance between the book value of assets and liabilities is recorded as a
separate equity account called the Cumulative Translation Adjustment (CTA).

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