Financial Analysis #20 - Multinational Operations

Question 1

translation exposure (def. and process)

Answer 1

LOS 20.b

Translation of foreign currency finanical statements:

• converting the accounts of foreign subsidiaries to parent firm’s reporting currency i.e. “presentational currency”
• three-step process:
  
  1. Identify subsid. functional currency
  2. convert foreign currency balances into functional currency
  3. convert functional currency balances into parent’s reporting currency using closing rates (if functional and reporting currencies differ)

Question 2

foreign currency translation definitions (SFAS 52)

Answer 2

LOS 20.a

• functional currency - currency of the primary economic environment in which the firm does business. (i.e. spends and generates cash); some subjectivity
• presentational currency - currency in which the multi-national firm prepares its final FS
• local currency - currency of the country in which the foreign subsidiary is located

Question 3

foreign currency denominated transactions (including sales)

Answer 3

LOS 20.b

On the IS:

• at transaction date: measured in reporting (presentational) currency at the spot rate
• at BS date (if before settle date): forex gain (loss) recognized
• at settlement date: forex gain (loss) recognized
  
  • if after BS date: additional forex gain (loss) recognized

NOTE: gain/loss recognition is not standardized; potential comparison issues

Question 4

exchange rate definitions

Answer 4

LOS 20.d

• current rate = forex rate as of BS date (closing date)
• average rate = average forex rate over reporting period
• historical rate = forex rate that existed when a particular transaction occured:
  
  • not fixed in time e.g. rate when stock was issued

Question 5

temporal method

Answer 5

LOS 20.c,d

Temporal Method