TRANSLATING%20FOREIGN%20STATEMENTS:%20%20THE%20TEMPORAL%20METHOD%20 - PowerPoint PPT Presentation

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TRANSLATING%20FOREIGN%20STATEMENTS:%20%20THE%20TEMPORAL%20METHOD%20

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The term 'temporal' first appeared as an accounting term in ... Nonfunctional. Currency (Pesos) Functional (& Reporting) Currency (U.S. Dollar) Slide 19-20 ... – PowerPoint PPT presentation

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Title: TRANSLATING%20FOREIGN%20STATEMENTS:%20%20THE%20TEMPORAL%20METHOD%20


1
CHAPTER 19
  • TRANSLATING FOREIGN STATEMENTS THE TEMPORAL
    METHOD THE FUNCTIONAL CURRENCY CONCEPT

2
FOCUS OF CHAPTER 19
  • The Temporal Method of Translation
  • The Objectives of Translation under FAS 52
  • The Functional Currency Concept
  • U.S. Taxation of Foreign Subsidiary Earnings

3
The Temporal Method The Definition of Temporal
  • The dictionary defines temporal as of or
    nearthe temples (of the head).Not much help
    there!
  • Furthermore, the termtemporal is not
    specifically used in FAS 52.

4
The Temporal Method Temporal--The Defining
Moment
  • The term temporal first appeared as an
    accounting term in AICPA Research Study No. 12
    (1972).
  • Defined Expressing foreign currency amounts in
    dollars without changing their attributes.
  • Attribute The manner of valuing an item (such
    as cost, LCM, NRV, FMV).

5
The Temporal Method Dont Make Any Changes
  • Use exchange rates for assets and
    liabilitiesthat result in preserving the
    VALUATION BASIS.
  • Assets carried at value-based prices are
    expressed in dollars using the spot rate.
  • Assets carried at historical cost are expressed
    in dollars using historical rates.

WSJ 12/31/04.... 1.44
6
The Temporal Method Identifying The Driver
  • SUMMARY The valuation basis is the
    driver--that is, the determinant of the
    exchange rate to use to translate an asset or
    liability. Thus the driver must be identified.

7
The Temporal Method Whats Relevant and Whats
NOT
  • What is relevant?
  • How it is valued (cost, LCM, NRV, FMV).
  • Whats not relevant?
  • Whether it is current or noncurrent(in the
    balance sheet).
  • Maintaining the account item relationships that
    exist in the foreign currency statements.

Sustained
Overruled
8
The Temporal Method What Winds Up Being the
Focus?
  • The result of applying the temporal method
    generally enables one to view the method as a
    focus on the net monetary position
  • Monetary Assets gt Monetary Liabilities A
    net monetary asset position.
  • Monetary Assets lt Monetary Liabilities A
    net monetary liability position.

9
The Temporal Method Is It Monetary or Is It
Nonmonetary?
  • Monetary Items
  • Cash and accounts obligated to be settled in cash
    (includes investments in BONDS they have a due
    date).
  • Nonmonetary Items
  • Accounts that are not monetary items (includes
    investments in STOCKS).

Oil
10
The Temporal Method The Income
Statement--Which Rates?
  • Items Not Having Passed Through the B/S
  • Use spot rate at date when the item was
    recognized in the income statement.
  • Items Having Passed Through the B/S
  • Use historical spot rate--the rate at the date
    the item entered the balance sheet.

WSJ 4/15/04.... 1.61
11
The Temporal Method Just Passing Through to P/L
  • Items That Pass Through the B/S on Their Way to
    the Income Statement
  • Inventory
  • Depreciable fixed assets
  • Intangible assets
  • Prepaid expenses
  • Deferred charges
  • Unearned income

12
The Temporal Method Compared With the Current
Rate Method--P/L

Current Rate Temporal
Method
Method Rates to be used for Items not having
passed through the B/S......................
CR CR Items having
passed through the B/S......................
CR HR Type of rate for
items having passed through the B/S.........
EXIT ENTRY
13
The Temporal Method What and Where Time!
  • WHAT are the effects of exchange rate changes
    called?
  • Remeasurement Gains and Losses
  • WHERE are the effects of exchange rate changes
    reported?
  • In earnings.

14
The Temporal Method Again, The FASB Is NOT
Consistent
  • FASB says
  • Whether the effects of exchange rate changes as a
    result of using the temporal method are
    unrealized is not relevant--MUST REPORT CURRENTLY
    IN EARNINGS.
  • Whether the effects of exchange rate changes as a
    result of using the current rate method are
    unrealized is relevant--CANNOT REPORT CURRENTLY
    IN EARNINGS .

15
The Temporal Method Method Achieves Inflation
Adjusted Reporting
Assumptions Foreign unit buys land on 1/1/04
when the direct exchange rate is 1.00. Foreign
country has 25 inflation in 2004. Exchange
rate at 12/31/04 is .80--the .20 decrease is
due entirely to the foreign inflation.
LCUs
Exchange Rate U.S. Dollars
1/1/04.............. 1,000 HC x 1.00
HR 1,000 HC Inflation adj.. 250
x (.20) -0-
12/31/04.......... 1,250 CV x .80
CR 1,000
16
The Functional Currency ConceptCreated By A
Mere 43 Vote
  • SUMMARY OF FUNCTIONAL CURRENCY CONCEPT
  • For each foreign unit, identify the currency it
    primarily uses to generate and expend cash.
  • If a foreign currency, use the current rate
    method.
  • If the U.S. dollar, use the temporal method.

17
The Functional Currency ConceptPresumed Types
of Foreign Operations
  • Relatively Autonomous Units
  • Expected to have the foreign currency as the
    functional currency.
  • Relatively Nonautonomous Units
  • Expected to have the U.S. dollar as the
    functional currency.

Observation In the real world, its not that cut
and dried.
18
The Functional Currency ConceptWhen To
Disregard FASBs Indicators
  • When Operating in a
  • Highly Inflationary Economy
  • (approximately 100 cumulative inflation over
    3-year period) --
  • Must use the temporal method.

Currency depreciates in value.
19
Distinguishing Translationfrom Remeasurement
  • TRANSLATION (current rate method)
  • REMEASUREMENT (temporal method)

Functional Currency (Francs)
Reporting Currency (U.S. Dollar)
Nonfunctional Currency (Pesos)
Functional ( Reporting) Currency (U.S. Dollar)
20
Review Question 1
  • Under the temporal method, which of the following
    accounts is translated into dollars using only
    the current exchange rate? A. Purchases. B.
    Cost of sales. C. Depreciation expense. D.
    Gain on equipment disposal. E. Retained
    earnings (ending balance). F. Injury loss
    settlement. G. None of the above.

21
Review Question 1--With Answer
  • Under the temporal method, which of the following
    accounts is translated into dollars using only
    the current exchange rate? A. Purchases. B.
    Cost of sales. not translated by itselfC.
    Depreciation expense. D. Gain on equipment
    disposal. HR CR usedE. Retained earnings
    (ending balance). F. Injury loss settlement.
    G. None of the above.

22
Review Question 2
  • Under the temporal method, which of the following
    accounts is translated into dollars using the
    historical exchange rate? A. Inventory (LIFO).
    B. Income tax expense.C. Patent amortization
    expense. D. Deferred income taxes payable.E.
    Deferred charges.F. Bonds Payable
    (long-term).G. None of the above.

23
Review Question 2--With Answer
  • Under the current rate method, which of the
    following accounts is translated into dollars
    using the historical exchange rate? A.
    Inventory (LIFO). B. Income tax expense.C.
    Patent amortization expense. D. Deferred income
    taxes payable.E. Deferred charges.F. Bonds
    Payable (long-term).G. None of the above.

24
End of Chapter 19 (Appendix material follows)
  • Time to Clear Things Up--Any Questions?

25
U.S. Taxation of Foreign Subsidiary Earnings
Overall Perspective
  • FOREIGN SUBSIDIARIES
  • Cannot file a consolidated tax return with their
    U.S. parent.
  • U.S. PARENTS OF FOREIGN SUBSIDIARIES
  • Cannot use the dividends received deduction.
  • Can use foreign tax credits.

26
U.S. Taxation of Foreign Subsidiary Earnings
FASBs Rules
  • FASB Says
  • Record parent-level taxes on foreign subs income
    in the year the income is earned.
  • Exception If subs earnings are expected to be
    REINVESTED INDEFINITELY, no parent-level taxes
    need be recorded.

27
U.S. Taxation of Foreign Subsidiary Earnings
We Changed Our Minds
  • Change in Circumstances Concerning Reinvestment
    of Earnings
  • Treat as a change in estimate.
  • Unrecord taxes already recorded or record taxes
    that have not been recorded.
  • Do not restate prior periods.

28
U.S. Taxation of Foreign Subsidiary Earnings
The Fly in the Ointment
  • The Dividend Withholding Tax
  • The tax is paid to the foreign government at the
    time of the dividend payment.
  • The taxes paid are recorded as tax expense on the
    parents books--it is a tax to the RECIPIENT.
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