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PART II. ALTERNATIVE CURRENCY TRANSLATION METHODS

PART II. ALTERNATIVE CURRENCY TRANSLATION METHODS

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ALTERNATIVE CURRENCY

TRANSLATION METHODS

B. Monetary/Nonmonetary Method

1. Monetary accounts use

current rate

2. Pertains to

- cash

- accounts receivable

- accounts payable

- long term debt

10



ALTERNATIVE CURRENCY

TRANSLATION METHODS

3.



4.



Nonmonetary accounts

- use historical rates

- Pertains to

inventory

fixed assets

long term investments

Income statement accounts

- use average exchange rate

for the period.

11



ALTERNATIVE CURRENCY

TRANSLATION METHODS

C. Temporal Method

1. Similar to

monetary/nonmonetary

method.

2. Uses current method for

inventory.

12



ALTERNATIVE CURRENCY

TRANSLATION METHODS

D.



Current Rate Method

all statements use current

exchange rate for conversions.



13



PART III. STATEMENT OF INANCIAL

ACCOUNTING STANDARDS NO. 52

I. FASB NO. 52

A. Dissatisfaction with FASB No. 8

true profitability often disguised by

exchange rate volatility.

B. Balance sheet translation uses

current rate method.



14



STATEMENT OF INANCIAL ACCOUNTING

STANDARDS NO. 52

C.



Income statement uses

1. Weighted average rate

during period

or

2.



The rate in effect when

revenue and expenses

incurred.

15



STATEMENT OF FINANCIAL

ACCOUNTING STANDARDS NO. 52

D. Translation Gains or Losses

1. Recorded in separate equity



account



on balance sheet.

2. Known as cumulative

adjustment



translation



account.



16



STATEMENT OF INANCIAL ACCOUNTING

STANDARDS NO. 52

E. New Distinction under FASB No. 52:

functional v. reporting currency

1. Functional currency

for foreign subsidiary = the

currency used in the

primary

economic

environment in which it

operates.

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STATEMENT OF INANCIAL ACCOUNTING

STANDARDS NO. 52

2. Reporting currency

the currency the parent firm

uses to prepare its financial

statements.



18



STATEMENT OF FINANCIAL

ACCOUNTING STANDARDS NO. 52

3.



If foreign subsidiary’ operations are

direct extension of parent firm



e.g. Hong Kong assembly plant

which

sells all its products in the U.S.

market.

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PART IV. TRANSACTION EXPOSURE

I. WHEN DOES IT OCCUR?

A. From the time of agreement to time of

payment.

B. Arises from possibility of exchange rate

gains and losses from the transaction.

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PART II. ALTERNATIVE CURRENCY TRANSLATION METHODS

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