国际会计第七版英文版课后答案第六章.docx
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国际会计第七版英文版课后答案第六章.docx
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国际会计第七版英文版课后答案第六章
Chapter6
ForeignCurrencyTranslation
DiscussionQuestionsSolutions
1.Foreigncurrencytranslationistheprocessofrestatingaforeignaccountbalancefromonecurrencytoanother.Foreigncurrencyconversionistheprocessofphysicallyexchangingonecurrencyforanother.
2.Intheforeignexchangespotmarket,currenciesboughtandsoldmustbedeliveredimmediately,normallywithin2businessdays.ThusaSingaporeantouristbuyingU.S.dollarsattheairportbeforeboardingaplaneforNewYorkwouldhandoverSingaporedollarsandimmediatelyreceivetheequivalentamountinU.S.dollars.Theforwardmarkethandlesagreementstoexchangeafixedamountofonecurrencyforanotheronanagreeddateinthefuture.Forexample,aFrenchmanufacturerexportinggoodsinvoicedineurostoaJapaneseimporteron60daycredittermswouldbuyaforwardcontracttosellyenforeuros2monthsinthefuture.Transactionsintheswapmarketinvolvethesimultaneouspurchase(orsale)ofonecurrencyinthespotmarketandthesale(orpurchase)ofthesamecurrencyintheforwardmarket.Thus,aCanadianinvestorwishingtotakeadvantageofhigherinterestrateson6-monthTreasurybillsintheUnitedStateswouldbuyU.S.dollarswithCanadiandollarsinthespotmarketandinvestintheUnitedStates.ToguardagainstafallinthevalueoftheU.S.dollarbeforematurity(whentheU.S.dollarproceedsareconvertedbacktoCanadiandollars),theCanadianinvestorwouldsimultaneouslyenterintoaforwardcontracttosellU.S.dollarsforCanadiandollars6monthsinthefutureattodaysforwardexchangerate.
3.Thequestionreferstoalternativeexchangeratesthatareusedtotranslateforeignfinancialstatements.Thecurrentrateistheexchangerateatthefinancialstatementdate.Itissometimescalledtheyear-endorclosingrate.Thehistoricalrateistheexchangerateatthetimeoftheunderlyingtransaction.Theaveragerateistheaverageofvariousexchangeratesduringafiscalperiod.Sincetheaverageratenormallyisusedtotranslateincomestatementitems,itisoftenweightedtoreflectanyseasonalchangesinthevolumeoftransactionsduringtheperiod.Translationgainsandlossesdonotoccurifexchangeratesdonotchange.However,ifexchangerateschange,theuseofcurrentandaverageratescausestranslationgainsandlosses.Thesedonotoccurwhenthehistoricalrateisusedbecausethesame(constant)rateisusedeachperiod.
4.Inthisexample,theMexicanAffiliatesCanadiandollarloanisdenominatedinCanadiandollars.However,becausetheMexicanaffilia'tesfunctionalcurrencyisU.S.dollars,thepesoequivalent
oftheCanadiandollarborrowingwouldberemeasuredinU.S.dollarspriortoconsolidation.IftheMexicanaffiliate'sfunctionalcurrencywerethepeso,theCanadiandollarloanwouldberemeasuredinpesosbeforebeingtranslatedtoU.S.dollars.
5.Atransactiongainorlossoccurswhenaforeigncurrencytransaction,e.g.,aforeigncurrencyborrowing,issettledatadifferentexchangeratethanthatwhichprevailedwhenthetransactionwasoriginallyincurred.Inthiscasethereisanexchangeofonecurrencyforanother.Atranslationgainorloss,ontheotherhand,issimplytheresultofarestatementprocess.Thereisnophysicalexchangeofcurrenciesinvolved.
6.Itisnotpossibletocombine,add,orsubtractaccountingmeasurementsexpressedindifferentcurrencies;thus,itisnecessarytotranslatethoseaccountsthataremeasuredordenominatedinaforeigncurrencyintoasinglereportingcurrency.Foreigncurrencytranslationcaninvolverestatementorremeasurement.Inrestatement,thelocal(functional)currencyiskeptastheunitofmeasure;thatis,thetranslationprocessmultipliesthefinancialresultsandrelationshipsinthelocalcurrencyaccountsbyaconstant,thecurrentrate.Incontrast,remeasurementtranslateslocalcurrencyresultsasiftheunderlyingtransactionshadtakenplaceinthereporting(functional)currencyoftheparentcompany;forexample,itchangestheunitofmeasureofaforeignsubsidiaryfromitslocal(foreign)currencytotheU.S.dollar.
7.Majoradvantagesandlimitationsofeachofthemajortranslationmethodsfollow.
CurrentRateMethod
Advantages:
a.Retainstheinitialrelationshipsintheforeigncurrencystatements.
b.Simpletoapply.
Limitations:
a.Violatesthebasicpurposeofconsolidation,whichistopresenttheresultsofaparentanditssubsidiariesasiftheywereasingleentity.
b.Inconsistentwithhistoricalcost.
c.Presumesthatalllocalassetsandliabilitiesaresubjecttoexchangerisk.
d.WhilestockholdersequityadjustmentsshieldanMNCsbottomlinefromtranslationgainsandlosses,suchadjustmentscoulddistortcertainfinancialratiosandbeconfusing.
Current-noncurrentMethod
Advantages:
a.Distortionsintranslatedgrossmarginsarereducedasinventoriesandtranslatedatthecurrentrate.
b.Reportedearningsareshieldedfromthedistortingeffectsofcurrencyfluctuationsasexcesstranslationgainsaredeferredandusedtooffsetfuturetranslationlosses.
Limitations:
a.Usesbalancesheetclassificationasbasisfortranslation.
b.Assumesallcurrentassetsareexposedtoexchangeriskregardlessoftheirform.
c.Assumeslong-termdebtisshelteredfromexchangeraterisk.
Monetary-nonmonetaryMethod
Advantages:
a.Reflectschangesindomesticcurrencyequivalentoflong-termdebtonatimelybasis.Limitations:
a.Assumesthatonlymonetaryassetsandliabilitiesaresubjecttoexchangeraterisk.
b.Exchangeratechangesdistortprofitmarginsassalestransactedatcurrentpricesarematchedagainstcostofsalesmeasuredathistoricalprices.
c.Usesbalancesheetclassificationasbasisfortranslation.
d.Nonmonetaryitemsstatedatcurrentmarketvaluesaretranslatedathistoricalrates.TemporalMethod
Advantages:
a.Theoreticallyvalid:
compatiblewithanyaccountingmeasurementmethod.
b.Hastheeffectoftranslatingforeignsubsidiariesoperationsasiftheywereoriginallytransactedinthehomecurrency,whichisdesirableforforeignoperationsthatareextensionsofthepa'resnatctivities.Limitation:
a.Acompanyincreasesitsearningsvolatilitybyrecognizingtranslationgainsandlossescurrently.Inarguingforonetranslationmethodoveranother,yourstudentsshouldeventuallyrealizethat,inthepresentstateoftheart,thereisprobablynoonetranslationmethodthatisappropriateforallcircumstancesinwhichtranslationsoccurandforallpurposesthattranslationserves.Itisprobablymorefruitfultohavestudentsidentifycircumstancesinwhichtheythinkonetranslationmethodismoreappropriatethananother.
8.Thecurrentratemethodisappropriatewhentheforeignentitybeingconsolidatedislargelyindependentoftheparentcompany.Conditionswhichwouldjustifythismethodologyiswhentheforeignaffiliatetendstogenerateandexpendcashflowsinthelocalcurrency,sellsaproductlocallysothatitssellingpriceislargelyinsulatedfromexchangeratechanges,incursexpenseslocally,financesitsselflocallyanddoesnothaveverymanytransactionswiththeparentcompany.Incontrast,thetemporalmethodseemsappropriateinthoseinstanceswhentheforeignaffiliateoperationsareintegrallyrelatedtotheparentcompany.Conditionswhichwouldjustifyuseofthetemporalmethodarewhentheforeignaffiliatetransactsbusinessintheparentcurrencyandremitssuchcashflowstotheparentcompany,sellsaproductlargelyintheparentcountryandwhosesellingpriceissensitivetoexchangeratechanges,sourcesitsfactorinputsfromtheparentcompany,receivesmostofitsfinancingfromtheparentandhasalargetwowayflowoftransactionswithit.
9.ThehistoryofforeigncurrencytranslationintheUnitedStatessuggeststhatthedevelopmentofaccountingprinciplesdoesnotdependontheoreticalconsiderationssomuchasonpolitical,institutional,andeconomicinfluencesthataffectaccountingstandardsetting.Itmaybemorerealistictorecognizethattheoreticallysoundsolutionsareimpossibleaslongaspolicyprescriptionsareevaluatedonpracticalgrounds.Withoutspecificchoicecriteriaderivedfrominvestordecisionmodels,itisfruitlesstoarguetheconceptualmeritsofcompetingaccountingtreatments.Itisfarmoreproductivetoadmitthatforeigncurrencytranslationchoicesaresimplyarbitrary.
Readersofconsolidatedfinancialstatementsshouldknowthattheforeigncurrencytranslationmethodusedisoneofseveralalternatives,andthisshouldbedisclosed.Thisapproachismoreopenandreducesthechancethatreaderswilldrawmisleadinginferences.
10.Foreigninflation,inparticular,thedifferentialrateofinflationbetweenthecountryinwhichasubsidiaryislocatedandthecountryofitsparentdeterminesforeignexchangerates.Theserates,inturn,areusedtotranslateforeigncurrencybalancestoparentcurrency.
11.IntheUnitedKingdom,financialstatementsofaffiliatesdomiciledinhyperinflationaryenvironmentsmustfirstbeadjustedtocurrentpricelevelsandthentranslatedusingthecurrentrate;intheUnitedStates,thetemporalmethodwouldbeemployed.Thesecondpartofthisquestionisdesignedtogetstudentsfromabroadtofindoutwhatcompaniesintheirhomecountriesaredoingandtherebybeinapositiontosharetheirnewfoundknowledgewiththeirclassmates.Theyneedsimplygetontheinternetandreadthefootnotesofamajormultinationalcompanyintheirhomecountry.
12.UnderFASNo.52,theparentcurrencyisdesignatedasthefunctionalcurrencyforanaffiliate,whoseoperationsareconsideredtobeanintegralpartoftheparentcom'pasnyoperations.Accordingly,anythin
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