Multinational Operations

Front 1

Remeasurement involves

Back 1

"Remeasurement involves converting the local currency into functional currency
using the temporal method."

Front 2

Translation involves

Back 2

"Translation involves converting the functional currency into the parent's
presentation (reporting) currency using the current rate method. The current rate
method is also known as the all-current method."

Front 3

"management should consider the following factors in deciding
on the functional currency:"

Back 3

"• The currency that influences sales prices for goods and services.
• Currency of the country whose competitive forces and regulations mainly determine the sale price of goods and services.
• The currency that influences labor, material, and other costs.
• The currency from which funds are generated.
• The currency in which receipts from operating activities are usually retained"

Front 4

current rate method is used

Back 4

"If the functional currency and the parent's presentation currency differ, the
current rate method is used to translate the foreign currency financial statements.
Translation usually involves self-contained, independent subsidiaries whose
operating, investing, and financing activities are decentralized from the parent."

Front 5

temporal method is used

Back 5

"If the functional currency is the same as the parent's presentation currency, the
temporal method is used to remeasure the foreign currency financial statements.
Remeasurement usually occurs when a subsidiary is well integrated with the parent
(i.e., the parent makes the operating, investing, and financing decisions)."

Front 6

If a subsidiary is operating in a hyperinflationary environment

Back 6

"If a subsidiary is operating in a hyperinflationary environment, the functional
currency is considered to be the parent's presentation currency, and the temporal
method is used under U.S. GAAP. Under IFRS, the subsidiary's financial statements
are restated for inflation and then translated using the current rate method"

Front 7

Applying the Current Rate Method

Back 7

"• All income statement accounts are translated at the average rate.
• All balance sheet accounts are translated at the current rate except for common stock,
which is translated at the historical (actual) rate that applied when the stock was issued.
• Dividends are translated at the rate that applied when they were paid.
• Translation gain or loss is reported in shareholders' equity as a part of the cumulative translation adjustment (CTA)."

Front 8

Applying the Temporal Method

Back 8

"• Monetary assets and liabilities are remeasured at the current rate.
• Nonmonetary assets and liabilities are remeasured at the historical rate.
• Common stock and dividends paid are remeasured at the historical rate.
• COGS, depreciation, and amortization expense are remeasured at the historical rate.
• All other revenues and expenses are remeasured at the average rate.
• Remeasurement gains and losses are reported in the income statement."

Front 9

Income before translation gain/loss is different between the two methods

Back 9

This is because COGS and depreciation are translated/remeasured at different rates under the two
methods.
Under the current rate method, COGS and depreciation expense are translated at the average rate thereby reflecting the depreciating local currency.
Under the temporal method, COGS and depreciation expense are remeasured at historical (actual) rates, and thus, do not reflect the depreciating local currency.

Front 10

The translation gain/loss is different between the two methods

Back 10

The current rate method results in a translation loss, while the temporal method results
in a translation gain. This is NOT an unusual occurrence. Under the current rate
method, Vibrant's net assets (assets > liabilities) are exposed to the depreciating local
currency. Holding net assets in a depreciating environment results in a loss. Under the
temporal method, Vibrant's net monetary liabilities (monetary liabilities > monetary
assets) are exposed. Holding net monetary liabilities in a depreciating environment
results in a gain.

Front 11

Net income is different between the two methods.

Back 11

"This is because of the different exchange
rates used to translate/remeasure COGS and depreciation expense as previously
discussed.
In addition, the gain/loss recognized under the two methods are reported
in different financial statements. Under the current rate method, the translation loss is
reported in shareholders' equity as a part of the CTA. Under the temporal method, the
remeasurement gain is reported in the income statement.
Reporting the gain or loss in
the income statement results in more volatile net income."

Front 12

Total assets are different between the two methods

Back 12

"Total assets are different between the two methods because inventory and net fixed assets are
different. Inventory and fixed assets are translated at the current rate under the current
rate method thereby reflecting the depreciating local currency. Under the temporal
method, the historical rate is used, thus, inventory and fixed assets do not reflect the
depreciating local currency."

Front 13

"If the foreign currency is depreciating, translated mixed ratios (with an income
statement item in the numerator and an end-of-period balance sheet item in the
denominator) will be:"

Back 13

larger than the original ratio.

Front 14

"If the foreign currency is appreciating, translated mixed ratios (with an income
statement item in the numerator and an end-of-period balance sheet item in the
denominator) will be:"

Back 14

smaller than the original ratio.

Front 15

Analyzing the effect on the financial ratios of the choice of accounting method has the basic procedure as follows:

Back 15

"• Determine whether the local currency is appreciating or depreciating.
• Determine which rate (historical rate, average rate, or current rate) is used to convert
the numerator under both methods and analyze the effects on the ratio.
• Determine which rate (historical rate, average rate, or current rate) is used to convert
the denominator under both methods and analyze the effects on the ratio.
• Determine whether the ratio will increase, decrease, or stay the same based on the
direction of change in the numerator and the denominator."

Front 16

Restating for inflation under IFRS involves the following procedures:

Back 16

"• Nonmonetary assets and nonmonetary liabilities are restated for inflation using a
price index. Since most nonmonetary items are reported at historical cost, simply
multiply the original cost by the change in the price index for the period between
the acquisition date and the balance sheet date.
• It is not necessary to restate monetary assets and monetary liabilities.
• The components of shareholders' equity are restated by applying the change in the
price index from the beginning of the period or the date of contribution if later.
• The income statement items are restated by multiplying by the change in the price
index from the date the transactions occur.
• The net purchasing power gain or loss is recognized in the income statement based
on the net monetary asset or liability exposure. Holding monetary assets during
inflation results in a purchasing power loss. Conversely, holding monetary liabilities
during inflation results in a purchasing power gain."