Page 188 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 11: Management of Translation Exposure

(b) If we use the monetary/non-monetary method Notes
A/c exposure on Jan 1, 1992 is as follows:
Exposed Assets = US $ 1,77,777.77
Exposed Liabilities = US $ 1,22,222.21

Accounting Exposure = 55555.57
Accounting Loss as shown in CTA account is US $ 6,944.44 as per monetary/non-monetary
method.

C$ Exchange Rate Conversion to US $ on Jan 1, 1992
Cash 1,00,000 1.8 55,555.55
Accounts Receivable 2,20,000 1.8 1,22,222.22
Inventory 3,20,000 1.6 2,00,000.00
P & E 2,00,000 1.6 1,25,000.00
8,40,000 5,02,777.77
Current Liabilities 60,000 1.8 33,333.33
Long-term debt 1,60,000 1.8 88,888.88
Capital Stock 6,20,000 1.6 38,7500.00
CTA – (6,944.44)
8,40,000 5,02,777.77
Problem 2:
AV Ltd., is the Indian affiliate of a US sports manufacturer. AV Ltd manufactures items which are
sold primarily in the United States and Europe. AV’s balance sheet in thousands of rupees as of
March 31st is as follows:
Assets Liabilities and Net Worth
Cash ` 6,000 Accounts payable ` 3,500
Accounts receivable 4,500 Short-term bank loan 1,500
Inventory 4,500 Long-term loan 4,000
Net plant and equipment 10,000 Capital stock 10,000
Retained earnings 6,000
Total ` 25,000 ` 25,000

Exchange rates for translating the balance sheet into US dollars are:
` 35/$: Historic exchange rate, at which plant and equipment, long-term loan and common stock
were acquired or issued.
` 40/$: March 31st exchange rate. This was also the rate at which inventory was acquired.
` 42/$: April 1st exchange rate, after devaluation of 20%.
Assuming no change in balance sheet accounts between March 31st and April 1st, calculate
accounting gain or loss by the current rate method and by monetary/non-monetary method.
Explain accounting loss in terms of changes in the value of exposed accounts.

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