《国际财务管理》（英文版） Chap14 Management of Translation Exposure

Chapter Fourteen Management of Translation Exposure 14 Chapter objective This chapter discusses the impact that unanticipated changes in exchange rates may have on the consolidated financial statements of the multinational company

INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 14 Chapter Fourteen Management of Translation Exposure Chapter Objective: This chapter discusses the impact that unanticipated changes in exchange rates may have on the consolidated financial statements of the multinational company

Chapter Outline ● Translation Methods ● FASB Statement8 fASb Statement 52 o Management of Translation Exposure Empirical analysis of the Change from FASB 8 to FASB 52 McGraw-Hilylrwoin 14-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-1 Chapter Outline ⚫ Translation Methods ⚫ FASB Statement 8 ⚫ FASB Statement 52 ⚫ Management of Translation Exposure ⚫ Empirical Analysis of the Change from FASB 8 to FASB 52

Translation methods o Current/noncurrent method Monetary/Nonmonetary Method emporal method ● Current rate method McGraw-Hilylrwoin 14-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-2 Translation Methods ⚫ Current/Noncurrent Method ⚫ Monetary/Nonmonetary Method ⚫ Temporal Method ⚫ Current Rate Method

Current/Noncurrent method The underlying principal is that assets and liabilities should be translated based on their maturity Current assets translated at the spot rate noncurrent assets translated at the historical rate in effect when the item was first recorded on the books e This method of foreign currency translation was generally accepted in the United States from the 1930s until 1975. at which time fasb 8 became effective McGraw-Hilylrwoin 14-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-3 Current/Noncurrent Method ⚫ The underlying principal is that assets and liabilities should be translated based on their maturity. ◼ Current assets translated at the spot rate. ◼ Noncurrent assets translated at the historical rate in effect when the item was first recorded on the books. ⚫ This method of foreign currency translation was generally accepted in the United States from the 1930s until 1975, at which time FASB 8 became effective

Current/Noncurrent method Current assets Balance sheet Local Current translated at Currency Noncurrent the spot rate Cash 2.100DM $1,050 e.g. DM2=S1 Inventory ,500DM $750 Noncurrent fixed assets 3.000DM $1000 assets translated at Total Assets 6.600 DM $2800 the historical Current liabilities 200DM $600 rate in effect Long-Term debt 800DM $600 when the item Common stock 2.700DM $900 was first Retained earnings 900DM $700 recorded on CTA ·= the books Total liabilities and 6.600DM $2800 e.g. DM3=S1 Equity McGraw-Hilylrwoin 144 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-4 Current/Noncurrent Method ◼ Current assets translated at the spot rate. e.g. DM2=$1 ◼ Noncurrent assets translated at the historical rate in effect when the item was first recorded on the books. e.g. DM3=$1 Balance Sheet Local Currency Current/ Noncurrent Cash 2,100 DM $1,050 Inventory 1,500 DM $750 Net fixed assets 3,000 DM $1,000 Total Assets 6,600 DM $2,800 Current liabilities 1,200 DM $600 Long-Term debt 1,800 DM $600 Common stock 2,700 DM $900 Retained earnings 900 DM $700 CTA -------- -------- Total Liabilities and Equity 6,600 DM $2,800

Monetary/Nonmonetary Method The underlying principal is that monetary accounts have a similarity because their value represents a sum of money whose value changes as the exchange rate changes All monetary balance sheet accounts(cash, marketable securities, accounts receivable, etc. of a foreign subsidiary are translated at the current exchange rate All other(nonmonetary) balance sheet accounts(owners equity, land) are translated at the historical exchange rate in effect when the account was first recorded McGraw-Hilylrwoin 14-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-5 Monetary/Nonmonetary Method ⚫ The underlying principal is that monetary accounts have a similarity because their value represents a sum of money whose value changes as the exchange rate changes. ⚫ All monetary balance sheet accounts (cash, marketable securities, accounts receivable, etc.) of a foreign subsidiary are translated at the current exchange rate. ⚫ All other (nonmonetary) balance sheet accounts (owners’ equity, land) are translated at the historical exchange rate in effect when the account was first recorded

Monetary/Nonmonetary Method All monetary Balance sheet Local Monetary/ balance sheet Currenct Nonmonetary accounts are Cash 2,100DM $1,050 translated at the Inventory 1.500DM $500 current exchange 3.000DM $1000 rate e. g. DM2=$1 Net fixed assets Total assets 6.600DN $2,550 All other balance Current liabilities 1,200DM $600 sheet accounts are translated at the Long-Term debt 1800DM $900 historical exchange Common stock 2,700DM $900 rate in effect when Retained earnings 900DM $0 the account was first CTa recorded Total Liabilities and 6.600 DM $2400 e. g. DM3=$1 Equity McGraw-Hilylrwoin 14-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-6 Monetary/Nonmonetary Method ⚫ All monetary balance sheet accounts are translated at the current exchange rate. e.g. DM2=$1 ⚫ All other balance sheet accounts are translated at the historical exchange rate in effect when the account was first recorded. e.g.DM3=$1 Balance Sheet Local Currency Monetary/ Nonmonetary Cash 2,100 DM $1,050 Inventory 1,500 DM $500 Net fixed assets 3,000 DM $1,000 Total Assets 6,600 DM $2,550 Current liabilities 1,200 DM $600 Long-Term debt 1,800 DM $900 Common stock 2,700 DM $900 Retained earnings 900 DM $ 0 CTA -------- -------- Total Liabilities and Equity 6,600 DM $2,400

Temporal Method The underlying principal is that assets and liabilities should be translated based on how they are carried on the firm s books o Balance sheet account are translated at the current spot exchange rate if they are carried on the books at their current value o Items that are carried on the books at historical costs are translated at the historical exchange rates in effect at the time the firm placed the item on the lOoKS McGraw-Hilylrwoin 14-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-7 Temporal Method ⚫ The underlying principal is that assets and liabilities should be translated based on how they are carried on the firm’s books. ⚫ Balance sheet account are translated at the current spot exchange rate if they are carried on the books at their current value. ⚫ Items that are carried on the books at historical costs are translated at the historical exchange rates in effect at the time the firm placed the item on the books

Temporal Method Items carried on the Balance Sheet Local Temporal books at their Currency current value are Cash 2.100DM $1050 translated at the Inventory 1,500DM $900 spot exchange rate Net fixed assets 3.000DM $1000 e. g. DM2=$1 Total assets 6.600DM $2950 Items that are Current liabilities 1200DM $600 carried on the Long-Term debt 1,800DM $900 books at historical Common stock 2.700DM $900 costs are translated Retained earnings 900DM $0 at the historical CTA exchange rates Total liabilities and 6.600 DM $2400 e.g. DM3=S equity McGraw-Hilylrwoin 14-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-8 Temporal Method ⚫ Items carried on the books at their current value are translated at the spot exchange rate. e.g. DM2=$1 ⚫ Items that are carried on the books at historical costs are translated at the historical exchange rates. e.g. DM3=$1 Balance Sheet Local Currency Temporal Cash 2,100 DM $1,050 Inventory 1,500 DM $900 Net fixed assets 3,000 DM $1,000 Total Assets 6,600 DM $2,950 Current liabilities 1,200 DM $600 Long-Term debt 1,800 DM $900 Common stock 2,700 DM $900 Retained earnings 900 DM $ 0 CTA -------- -------- Total Liabilities and Equity 6,600 DM $2,400

Current rate method o All balance sheet items(except for stockholder's equity) are translated at the current exchange rate Very simple method in application aplug equity account named cumulative translation adjustment is used to make the balance sheet balance McGraw-Hilylrwoin 14-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 14-9 Current Rate Method ⚫ All balance sheet items (except for stockholder’s equity) are translated at the current exchange rate. ⚫ Very simple method in application. ⚫ A “plug” equity account named cumulative translation adjustment is used to make the balance sheet balance