13

Translation of Financial
Statements of Foreign Affiliates

Advanced Accounting, Fifth Edition

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13-1
 Foreign Affiliates:

Contoh: perusahaan Indonesia memilikia anak

Perusahaan di Malaysia

Local Currency : MU setempat  Ringgit

Functional Currency : MU pelaporan  USD

Induk  FC dan RC  IDR

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13-2
LO 8 The functional currency is the U.S. dollar.
 Translation Method

To accomplish the objectives of translation,

two translation methods are used depending on
the functional currency of the foreign entity:
Current rate method.
Temporal method.

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13-3
LO 8 The functional currency is the U.S. dollar.
 Translation of Foreign Currency Financial Statements

Local Books kept in

currency local currency

Remeasure- Not Temporal Temporal

ment necessary method method

Functional Local U.S. A third

currency currency dollar currency

Translation Current Not Current

rate method necessary rate method

U.S. dollar U. S. dollars

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13-4
 Translation Method – current rate method

Current rate method.

 All assets and liabilities are translated using the
current exchange rate.
 Revenue and expense transactions are translated
at the exchange rate prevailing on the date each
underlying transaction occurred.
 Since separate translation of each transaction is
usually impractical, an appropriate average rate
can be used to approximate the results that would
be obtained from translation of each transaction.

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13-5
LO 8 The functional currency is the U.S. dollar.
 Translation Method - current rate method

Current rate method Translation

All assets and Current exchange
liabilities. rate.
Revenues and Exchange rate on the
expenses. date each transaction
occurred.

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13-6
LO 8 The functional currency is the U.S. dollar.
 Translation Method - current rate method

Current Rate Method Translation

Assets and liabilities Current exchange rate
Paid-in capital Historical rate
Beginning R/E Equals ending balance of last year

Dividends Historical rate when dividend is

declared
Revenue and Expenses Average exchange rate
Cumulative translation Balance amount in the balance
adjustment sheet
Current year translation Other comprehensive income
adjustment (shareholders’ equity)
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13-7
LO 8 The functional currency is the U.S. dollar.
 Translation Method – temporal method

Temporal method.
 Monetary assets and liabilities such as cash,
receivables, and payables are translated at the current
exchange rate.
 Assets and liabilities carried at historical cost are
translated at historical exchange rates.
 Assets and liabilities carried at current values (such as
inventory carried at market when applying the lower of
cost or market rule) are translated at the current
exchange rate.
 Thus, the temporal method places emphasis on whether
an account is measured in terms of historical cost or
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13-8
current values. LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

Temporal Method Translation

Monetary assets and liabilities Current exchange rate.
(cash, a/r, a/p).
Assets and liabilities carried Historical exchange
at historical cost. rates.
Assets and liabilities carried Current exchange rate.
at current values.
Revenues and expenses Historical exchange
related to assets and rates.
liabilities translated at
historical rates.
Other revenues and expenses. Exchange rate on date
transaction occurred.
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13-9
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

The remeasurement process is as follows:

1. Monetary assets and liabilities (for example, cash,
receivables, and most liabilities) that are expressed in the
balance sheet at current values are translated using the
current rate. (An asset or a liability is monetary if it
represents a claim to a fixed amount of dollars. All other
assets and liabilities are nonmonetary)
2. Nonmonetary assets and liabilities carried at past exchange
prices (historical cost) are translated at historical exchange
rates, which results in translating these amounts to the
equivalent number of dollars on the date the transaction
took place.

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13-10
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

The remeasurement process is as follows:

3. Nonmonetary assets and liabilities carried at current or
future exchange prices (for example, marketable securities
or inventory carried at replacement cost) are translated at
the current exchange rate.
4. Paid-in capital accounts are translated using the historical
exchange rate at the date of acquisition, or at the date the
original capital transaction(s) occurred if subsequent to
acquisition.

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13-11
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

The remeasurement process is as follows:

5. The components that make up the ending retained earnings
balance are translated as follows:
a. The beginning balance is set equal to the ending balance
of the last period.
b. Dividends are translated at the rate existing on the
date of the declaration.
c. Net income or loss is carried forward from the
translated income statement.

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13-12
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

The remeasurement process is as follows:

6. Revenues and expenses related to assets and liabilities
translated at historical rates (primarily inventory cost and
depreciation) are translated at the respective historical
rates used to translate the related asset or liability.
7. Other revenue and expense accounts are translated in a
manner that produces approximately the same results as if
the individual transactions were translated at the rate in
effect when the transaction occurred; generally a weighted
average rate is used for all transactions for simplicity’s
sake.
8. The translation gain or loss is reported in the income
statement
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13-13
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

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LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

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13-15
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

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13-16
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

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13-17
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

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13-18
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

Analysis
gain or
loss:

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13-19
LO 8 The functional currency is the U.S. dollar.
 Translation – Comparison the Two Methods

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13-20
LO 8 The functional currency is the U.S. dollar.
 Translation – Temporal Method

Exercise 13-5: On January 1, 2008, Trenten Systems, a U.S.-

based company, purchased a controlling interest in Grant
Management Consultants located in Zurich, Switzerland. The 2018
financial statement are bellows:

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13-21
LO 7 The functional currency is the local currency.
 Translation – Temporal Method

Exercise 13-5: On January 1, 2008, Trenten Systems, a U.S.-

based company, purchased a controlling interest in Grant
Management Consultants located in Zurich, Switzerland. The 2018
financial statement are bellows:

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13-22
LO 7 The functional currency is the local currency.
 Translation – Temporal Method

Exercise 13-5: On January 1, 2008, Trenten Systems, a U.S.-based

company, purchased a controlling interest in Grant Management
Consultants located in Zurich, Switzerland.
Direct exchange rates for Swiss franc are:
Dollars per Franc
January 1, 2008 $.5987
December 31, 2008 .5321
Average for 2008 .5654
Dividend declaration and payment date .5810

Required:

a. Convert (re-measure) the financial statements of the foreign

subsidiary using the temporal method of translation

b. Prepare a schedule to verify gain or loss

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LO 7 The functional currency is the local currency.
c.
13-23 .
 Translation – Temporal Method
Exercise 13-5: (Temporal Method)
Swiss Translation
Income Statement Francs Rate U.S. Dollars
Revenue 75,000
75,000 0.5654 42,405
Operating expenses: depreciation (3,000)
(3,000) 0.5987 (1,796)
Operating expenses: other (27,000)
(27,000) 0.5654 (15,266)
Translation loss (198)
Net
Net income
income 45,000
45,000 25,145
Retained earnings 1/1 10,000
10,000 0.5987 5,987
55,000
55,000 31,132
Dividends (15,000)
(15,000) 0.5810 (8,715)
Retained earnings 12/31 40,000
40,000 22,417

Balance Sheet
Cash and receivables 55,000
55,000 0.5321 29,266
Net property, plant, equipment 37,000
37,000 0.5987 22,152
Total
Total assets
assets 92,000
92,000 51,418

Accounts payable 32,000

32,000 0.5321 17,027
Common stock 20,000
20,000 0.5987 11,974
Retained earnings 40,000
40,000 22,417
Total
Total liab.
liab. & &equity
equity 92,000
92,000 51,418
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 Translation – Temporal Method

Exercise 13-5: Prepare a schedule to verify the

translation gain or loss.
Swiss Translation
Francs Rate $

Net monetary liability position - 1/1 (10,000) $.5987 (5,987)

Adjustment for changes in net monetary position:
Increase in cash and receivables from sales 75,000 .5654 42,405
Less: Decrease in net asset position:
Other operating expenses (27,000) .5654 (15,266)
Dividends (15,000) .5810 (8,715)
Net asset position translated --- 12,437
Net monetary asset position-12/31 23,000 .5321 12,238
Translation gain (loss) (199)

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LO 7 The functional currency is the local currency.
 Financial Statement Disclosure

Companies are required to disclose certain items, as follows:

1. The aggregate translation gain or loss included in the

determination of net income for the period, including gains or
losses related to forward contracts, should be disclosed in
either the financial statements or notes thereto.

2. An analysis of the cumulative translation adjustment equity

account should be provided in a separate statement or note or
as part of a statement of changes in equity. The analysis
should include:

a. The beginning and ending cumulative translation

adjustment amounts
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13-26
LO 10 Required disclosure.
 Financial Statement Disclosure

b. The aggregate adjustment for the period resulting from

the translation of foreign currency statements and gains
and losses from certain hedging activities and
intercompany long-term investment transactions

c. The amount of income taxes for the period allocated to

the cumulative translation adjustment equity account.

d. The amounts transferred from the cumulative translation

adjustment equity account and included in the
determination of net income for the period as a result of
the sale of part or all of an investment in a foreign entity.

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LO 10 Required disclosure.
 Financial Statement Disclosure

3. Exchange rate changes that occur after the balance sheet

date and their effect on unsettled foreign currency
transactions, if significant.

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LO 10 Required disclosure.
 Date of Acquisition

Illustration: Recall that on January 2, 2012, P Company

acquired for 2,000,000 francs an 80% interest in SFr. Company.
The direct exchange rate for francs on January 2, 2012, was
$.15. The entry to record the acquisition is

Investment in SFr Company 300,000

Cash 300,000

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 Date of Acquisition
On January 2, SFr Company reported common stock of 960,000
francs, additional paid-in capital of 300,000 francs, and retained
earnings of 480,000 francs for a net asset balance of 1,740,000
francs. The difference between implied and book value in francs
and dollars is allocated to land and buildings.

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13-30
 After Acquisition
P Company accounts for its investment by the cost method. In this
case, SFr Company declared and paid a 300,000 franc dividend on
September 1 when the direct exchange rate was $.16. The book
entry to record the dividend receipt is:

Cash 38,400
Dividend income 38,400
(300,000 francs x $.16 = $48,000 x .80 = $38,400)

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 After Acquisition
Workpaper entries assuming current rate method.

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 After Acquisition

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 After Acquisition

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 Consolidation Assuming Temporal Method

The major differences between the workpapers are as follows:

1. Under the temporal method,
 the translation gain or loss is included in the subsidiary’s income statement
and becomes a part of its ending retained earnings balance.

 The controlling interest in the gain or loss is recognized as part of

consolidated net income in the current period.

 In subsequent periods the gain or loss is included in consolidated retained

earnings as part of the reciprocity entry.

2. The unamortized portion of the difference assigned to land and

buildings and the amortization for the current period retain their
historical dollar values since such nonmonetary assets are translated
using historical rates.

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 Remeasurement and Translation of Transactions

FASB ASC section 830–20–20 defines a foreign currency

transaction as one that is denominated in a currency other than
the entity’s functional currency.
1. At the transaction date, the current exchange rate is used to
measure and record a foreign currency transaction in the
functional currency of the recording entity.

2. At subsequent balance sheet dates, recorded balances that

are denominated in a currency other than the functional
currency are adjusted to the functional currency using the
current exchange rate.

3. Any transaction gain or loss resulting from this procedure is

recognized currently in income.
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 Intercompany Receivables and Payables

FASBASC paragraph 830–20–35–1 requires that transaction

gains and losses on intercompany receivables and payables be
recognized in the period that the exchange rate changes.

The procedures for doing so are similar to those discussed in

the preceding section.

However, a company is required to distinguish between

transactions that are of a long-term investment nature and
other transactions.

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 Elimination of Intercompany Profit

Profits and losses attributable to intercompany sales or

transfers are eliminated on the basis of the exchange rate at
the date of each sale or transfer.

The use of averages or reasonable approximations of specific

rates in effect on the due date of each transaction is
permitted.

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 Liquidation of a Foreign Investment

Upon the sale of part or all of an investment in a foreign entity,

a pro-rata share of the amount included in the accumulated
translation adjustment equity account associated with that
foreign investment is removed and reported as part of the gain
or loss from the disposition of the investment.

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 ADVANCE ACCOUNTING II - SYLLABUS

SESION TOPIC
I & II Chapter 10 (Book 1) : Insolvency – Liquidation &
Reorganization

III Chapter 11(Book 1): International Financial Reporting

Standard

IV & V Chapter 12 (Book 1): Accounting for Foreign Currency

Transactions and Hedging Foreign Exchange Rate
VI & VII Chapter 13 (Book 1): Translation of Financial
Statements of Foreign Affiliates
MID SEMESTER TEST
VIII Chapter 14 (Book 1): Reporting for Segments and For
Interim Financial Periods
IX & X Chapter 15 (Book 1): Partnership : Formation,
Operation, and Ownership Changes
XI & XII Chapter 16 (Book 1): Partnership : Liquidation

XIII & Chapter 18 (Book 2): Accounting For Branch

XIV Operation

FINAL SEMESTER TEST

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 Copyright

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