TRANSLATING FOREIGN STATEMENTS:

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CHAPTER 18

• TRANSLATING FOREIGN STATEMENTS
• THE CURRENT RATE METHOD

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FOCUS OF CHAPTER 18

• The Way to Restate to U.S. GAAP
• Conceptual Issues in Translating Foreign Currency
  Statements to U.S. Dollars
• The Current Rate Method of Translation
• Reporting the Effects of Exchange Rate Changes in
  a Statement of Comprehensive Income

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Restating To U.S. GAAP Only Oranges Make
Orange Juice

• Not restating to U.S. GAAP would be mixing apples
  and oranges together.

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Restating to U.S. GAAP To Be Done BEFORE
Translation--NOT AFTER

• Restating Per Se No controversy.
• All agree that it must be done.
• Restating BEFORE Translating
• Almost all agree that this is the way to go.
• Restating AFTER Translating
• Very few believe that this is the way to go.

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Restating to U.S. GAAP Is It Easy or Hard?

• Difficulty of Restating to U.S. GAAP
• A right-to-work law for accountants .
• Often a major task--sometimes 50 adjusting
  entries are needed. (May have to work until the
  cows come home.)
• Most U.S. companies have their foreign units
  restate to U.S. GAAP before submitting their
  financial statements.

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Restating To U.S. GAAP Is It Easier or Harder
Than Translating

• Translating Foreign Currency Statements Into U.S.
  Dollars
• Translating is usually much much easier than
  restating to U.S. GAAP.
• In most cases, the translation process is
  automatically done using specialized software
  programs.

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Restating To U.S. GAAP Comparing WWD With
WWWHBD

• Step 1 List account balances using WWD
  (what was done)--the FOREIGN
  GAAP amounts.
• Step 2 Determine the account balances using
  WWWHBD (what we wish had been
  done)--the U.S. GAAP amounts.
• Step 3 Compare amounts in steps 1 and 2--the
  differences make up the entry to
  restate to U.S. GAAP.

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The Current Rate MethodIts As Easy As Pie

• Merely translate ALL assets, liabilities,
  revenues, expenses, gains, and losses at the
  current rate.
• Translate equity accounts as follows
• Common Stock and APIC Use historical
  exchange rates.
• Retained Earnings--B-O-Y Use prior period
  ending translated amount.

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The Current Rate Method The Definition of the
Current Rate

• You wont find the definition in the
  dictionary
• Furthermore, the FASB has a dual definition.

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The Current Rate Method The Current Rates
Defining Moment

• It all depends on whether you are talking about
  the balance sheet or the income statement
• Balance sheet--the spot rate at that date.
• Income statement--the rate existing when the
  item was recognized.
• Could be 365 (or 366) current rates.
• Usually twelve monthly rates are used.

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The Current Rate Method Whats Relevant and
Whats NOT

• What is relevant?
• Maintaining the account item relationships that
  exist in the foreign currency statements.
• Whats is not relevant?
• How it is valued (cost, LCM, NRV, FMV).
• Whether it is current or noncurrent (in B/S).
• Whether it is monetary or nonmonetary.

Sustained
Overruled
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The Current Rate Method Is Maintaining
Relationships Good?

• Only If It Results in Reflecting the True
  Economic Reality that Exists 2 2 4
• This does NOT always occur. 2 2 7

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The Current Rate Method What Winds Up Being the
Focus?

• The result of applying the current rate method
  generally enables one to view the method as a
  focus on the net asset position
• Assets gt Liabilities A net asset
  position.
• Assets lt Liabilities A net liability
  position.

Equals the parents investment
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The Current Rate Method Fixed Assets Can Go on
Quite a Ride

• In U.S. dollars, a foreign units fixed assets
  can be reported at wildly different amounts each
  year.

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The Current Rate Method What Is The True
Historical Cost In U.S. Dollars?
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 I. 1,000 HC
x 1.00 HR 1,000
II. 1,000 HC x .80 CR
800 III. 1,250 CV
x .80 CR 1,000

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The Current Rate Method The BIG QUESTION--What
Is the 800?
LCUs Exchange Rate
U.S. Dollars I. 1,000 HC
x 1.00 HR 1,000
II. 1,000 HC x .80 CR
800 III. 1,250 CV
x .80 CR 1,000
Is the 800 1. Historical cost. 2. Current
value. 3. Neither.

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The Current Rate Method Lets Play Hide and
Seek

• Where are the effects of exchange rate changes
  reported?
• You wont find them reported in earnings.
• You will find them reported in Other
  Comprehensive Income. The 3 options are
• Expand the bottom of Income Statement.
• Add a Statement of Comprehensive Income.
• Disclose in Statement of Changes in
  Stockholders Equity.

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2
3
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The Current Rate Method Sometimes The FASB Is
Not Consistent

• FASB says
• Whether FX gains losses on foreign currency
  transactions are unrealized is not relevant--MUST
  report currently in earnings.
• Whether the statement translation effects as a
  result of using the current rate method are
  unrealized is relevant--CANNOT report currently
  in earnings.

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Review Question 1

• Under the current rate method, which of the
  following accounts is NOT translated into dollars
  using the current exchange rate? A. Purchases.
  B. Cost of sales.C. Depreciation expense. D.
  Gain on equipment disposal. E. Retained
  earnings (ending balance).F. Flood
  loss--extraordinary item. G. None of the
  above.

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Review Question 2

• Under the current rate method, which of the
  following accounts is NOT translated into dollars
  using the current exchange rate? A. Inventory
  (LIFO). B. Income tax expense.C. Goodwill
  expense. D. Deferred income taxes payable. E.
  Deferred charges.F. Bonds Payable
  (long-term).G. None of the above.

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End of Chapter 18

• Time to Clear Things Up--Any Questions?