国际会计第六章外币交易.ppt

CHAPTER 6 Foreign Currency Translation,张晓旭 张浩然 陈曦 侯方仪,Insert Title Text,6.1 REASONS FOR TRANSLATION(P127),The primary reasons:Companies with significant overseas operations prepare consolidated financial statements that give statement readers an aggregate view of the firms global operations.,Translation,Click to edit title style,The additional reasons:,1.recording foreign currency transactions,2.measuring a firms exposure to the effects of currency gyrations,muincating with foreign audiences of interest,6.1 REASONS FOR TRANSLATION,Act of exchanging one type of money or security for another,It is simply a change in monetary expression.,Conversion,Translation,6.2 BANKGROUND AND TERMINOLOGY(P127-129),Click to edit title style,Foreign currency transactions,Spot transactions,Forward transaction,Swap transaction,6.2 BANKGROUND AND TERMINOLOGY(P127-129,the physical exchange of one currency for another in which delivery rakes place immediately.,agreements to exchange a specified amount of one currency for another at a future date.,It involves the simultaneous spot purchase and forward sale,or spot sale and forward purchase,of a currency.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Spot transactions:the physical exchange of one currency for another in which delivery rakes place immediately.,Factors:1.different inflation rates 2.differences in national interest rates 3.exceptions about the direction ot future rates,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Suppose that the cash balance of a U.S.subsidiary located in Bombay,India,on January 31 is INR1,000,000.The direct exchange rate=0.02232 INR1,000,000$0.02232=$22,320The indirect exchange rate=1/0.02232=44.8 INR1,000,000 INR44.8=$22,320,Two methods:Direct quote:the exchange rate specifies the number of domestic currency units needed to acquire a unit of foreign currency.Indirect quote:the exchange rate specifies the price of a unit of the domestic currency in terms of the foreign currency.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Forward transaction:agreements to exchange a specified amount of one currency for another at a future date.,It expressed at either a discount or a premium from the spot rate,or as outright forward rates.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Illustration:If spot Swiss francs are offered at$0.8318,while the six-month forward franc is offered at$0.8462,six-month Swiss francs are selling at a premium of 3.4%in the U.S.forward premium(discount)=(forward rate spot rate)/spot rate 12/n($0.8462-$0.8318)/$0.831812/6=3.4%Indirect quote:forward premium(discount)=(spot rate-forward rate)/forward rate 12/n,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Historical rate:the exchange rate prevailing when a foreign currency asset was first acquire or a foreign currency liability first incurred.Use of historical rates do not give rise to translation gains or losses which are increases or decreases in the reporting currency equivalent of the foreign currency.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Current rate:the exchange rate prevailing as of financial statement date.Use of the current rate gives rise to translation gains and losses.Average rate:a simple or weighted average of either historical or current exchange rates.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Translation vs.Transaction gains and lossesTranslation gains and losses:result from a restatement process.Transactions gains and losses:result from the physical exchange of one currency for another.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Gain or loss on a settled transaction:It arises whenever the exchange rate used to book the original transaction differs from the exchange rate used at settlement.Gains or losses on unsettled transaction:It arises whenever consolidated financial statements are prepared before settlement and the current rate has changed since the transaction date.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Foreign Currency Transaction,Feature:Settlement is effected in a foreigh currency.Functional currency:The primary currency in which it transacts business and generates and spends cash.,Functional Currency Criteria,Single-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are one single event.,Single-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are a single event.,Two-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are seperate events.FAS NO.52 requires the two-trasanction method of accounting for foreign currency transactions Gains and losses on settled and unsettled transactions are included in the determination of income.,Two-transaction Perspective,Foreign currency translation,A foreign currency asset or liability is said to be exposed to exchange rate risk if its parent currency equivalent changes owing to a change in the exchange rate used to translate that asset or liability.a.Single-rate Method b.Multiple-rate Method,Single-rate Method,All items are exposed to exchange rate risk,except contributed capital or common stockAdvantages:1.The consolidated statements preserve the original financial statement relationships.2.It is simple to apply.Limitations:1.It seldom accords with economics reality.2.Translated asset values make little sense unless local price-level adjustments are made first.3.Translating all foreign currency balances by the current rate creates gains and losses every time exchange rates change.Many of them may never be fully realized.,Multiple-rate Method,a.Current-noncurrent Method b.Monetary-nonmonetary Method c.Temporal Method,Current-noncurrent Method,Balance Sheet:Current asssets and liabilities:current rates Noncurrent asssets and liabilities:historical rates Income Statement:Revenues and expenses(excluding depreciation and amortization):average rates.Depreciation and amortization charges at historical rates in effect when related assets are acquired.Current items are exposed to exchange risk,which is not true.,Current-noncurrent Method,Limitations:1.Using the year-end rate to translate current assets implies that all foreign currency,cash,receivables,and inventories are equally exposed to exchange risk.2.Translation of long-term debt at the historical rate shifts the impact of fluctuating currencies to the year of settlement.3.Current and noncurrent definitions are merely a classification scheme,not a conceptual justification,of which rates to use in translation.,Monetary-nonmonetary Method,Balance Sheet:Monetary asssets and liabilities:current rates Nonmonetary asssets and liabilities:historical rates Income Statement:Income statement items:similar as current-noncurrent method Advantages:Monetary items are exposed to exchange risk,which will reflect their realizable or settlement values and changes in the domestic currency equivalent of long-term debt in the period in which the exchange rates change.,Monetary-nonmonetary Method,Limitations:1.Translating all nonmonetary assets at historical rates,which is not reasonable for assets stated at current market values.2.Multiplying the current market value of an nonmonetary assets by a historical exchange rate yields an amount in the domestic currency that is neither the items current equivalent nor its historical cost.3.Distorting profit margins by matching sales at current prices and translation rates against cost of sales measured at historical costs and translation rates.,Temporal Method,The method does not change the attribute of an item being measured but the unit of measure.The distinction between temporal method and monetary-nonmonetary method is only if other asset-valuation bases are employed.Nonmonetary items translated at rates that preserve their original measurement bases.Foreign currency balances at historical cost are translated at historical rates.Foreign currency balances at current cost or market value are translated at the current rates.,Temporal Method,Sharing most of the advantages and disadvantages of monetary and nonmonetary method.In deliberately ignoring local inflation,this method shares a limitation with the other translation method discussed.(Of course,historical cost accounting ignores inflation as well),Different Methods,Financial Statement Effects,Financial Statement Effects,Financial Statement Effects,The difference is large,given that all the results are based on the same facts.What is more,operations reporting,respectable profits before currency translation may well report losses or much lower earings after translation Sollution:such as hedging strategies,Which Is Best?,There is not a single translation method which is appropriate for all circumstances in which translations occur and for all purposes that translation serve.1.The circumstances underlying foreign exchange translations differ widely.2.Translations are made for different purpose.What are acceptable foreign currency translation methods and under what conditions?,Translation Methods&Readers Viewpoint,Translation Methods&Readers Viewpoint,The purpose of translation is to change the unit of measure for financial statements of foreign subsidiaries to the domestic currency,and to make the foreign statement to accounting principles generally accepted in the country of the parent companyTemporal principle,It changes a measurement in foreign currency into a measurement into a measurement in domestic currency without changing the basis of measurement.It is easily adapted to processes that make accounting adjustments during the translation.,Translation Methods&Readers Viewpoint,Local perspective:the translated accounts of foreign subsidiaries keep the local currency as the unit of measurement.The characteristics of current-rate method,It is a straightforward translation from one currency language to another.There is no change in the nature of the accounts;only their particular form of expression is changed.Translation at current rate does not change any of the initial relationships in the foreign currency statements,because all accounts balances are simply multiplied by a constant.,Other conditions fit current-rate method,When the accounts of an independent company translated for the convenience of foreign stockholders or other external user groups When price-level-adjusted accounts are translated to another currency.,Translation Methods&Readers Viewpoint,Appropriate Current Rate,An appropriate translation rates should reflect economic and business reality as closely as possible,Preferable,Translation Gains and Losses,Where Are We？,TRANSLATION ACCOUTING DEVELOPMENT,Tanslation accounting practices have evolved over time in response to the increasing complexity of multinational operations and changes in the international meonetary system.Since financial reporting initiatives in the United States are representative experiences elsewhere,a brief summary will provide,some historical perspective the current state of translation accounting.,TRANSLATION ACCOUTING DEVELOPMENT,Tanslation accounting practices have evolved over time in response to the increasing complexity of multinational operations and changes in the international meonetary system.Since financial reporting initiatives in the United States are representative experiences elsewhere,a brief summary will provide,some historical perspective the current state of translation accounting.,TRANSLATION ACCOUTING DEVELOPMENT,：Before 1965 the translation practices of many U.S.companies were guided by Chapter 12 of Accounting Research Bulletin No.43.This statement advocated the current noncurrent method：ARB No.43 allowed certain exceptions to current-noncurrent method.Translating all foreign currency payables and receivables at the current rate was allowed after Accounting Principles Board Opinion No.6 was issued in 1965.This change to ARB No.43 gave companies another translation option.,Pre-1965,To end the variety of treatments allowed under previous translation standards,the Financial Accounting Standards Board(FASB)issued FAS No.8 in 1975 In May 1987,the FASB invited public comment on its first 12 pronouncements.After many public meetings and two exposure drafts,issued Statement of Financial Accounting Standards No.52 in 1981.,TRANSLATION ACCOUTING DEVELOPMENT,FEATURES OF FASB 52 AND ISA 21,Reflect in consolidated statements the financial results and relationships measured in the primary currency in which each consolidated entity does business.Provide information compatible with the expected economic effects of an exchange rate change on an entitys cash flows and equity,Objectives:,These objectives are based on the concept of a functional currency.Recall that the functional currency of an entity is the currency of the primary economic environment in which it operates and generates cash flows.Moreover,the functional currency designation determines the choice of translation method employed for consolidation purpose and the disposition of exchange gains and losses.,FEATURES OF FASB 52 AND ISA 21,Translation when the local currency is functional.Foreign currency financial statements translated to reporting currency using the current rate method.Translation gains and losses disclosed as a separate component of consolidated equity.,The following current rate procedures are used,All foreign currency assets and liabilities are translated to dollars using the exchange rate prevailing as of the balance sheet date,capital accounts are translated at historical rate.Revenues and expenses are translated using the exchange rate prevailing on the transacion date,although weighted average rates can be used for expediency.Translation gains and losses are reported in a separate component of consolidatd stockholders equity.These exchange adjustments do not go into the income statement until the foreign operation is sold or the investment is judged to have permanently lost value.,Translation when the parent currency is functional.Foreign currency financial statements remeasured to reporting currency using the temporal method.Translation gains and losses resulting from the translation process are included in current income,All translation gains and losses resulting from the tranalation process are included in determining current periodincome.,Monetary assets and liabilities and non-monetary assets valued at current market price are translated using the rate prevailing as of the financial statement date;other non-monetary items and capital accouts are translated at historical rate.Revenues and expenses are translated using average exchange rates for the period except those items realted to non-monetary item