TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
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Transcript of TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS
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TRANSLATION OF FOREIGN
CURRENCY FINANCIAL STATEMENTS
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When a U.S. company prepares its financial statements, it must include its foreign-based operations:a) measured in US dollarsb) reported using GAAP
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The foreign operations may be:a) subsidiariesb) branchesc) other investments of the US firm
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OBJECTIVE OF TRANSLATION PROCESS:
Provide information that shows the expected impact of exchange
rate changes on the US company’s cash flows and equity.
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STEPS IN THE TRANSLATION PROCESS:Receive financial statements of foreign subsidiary (reported in a foreign currency).Restate to conform to GAAP (on worksheet).Translate amount in each account into US $.Consolidate the translated accounts with
the parent’s accounts.
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METHODS OF TRANSLATION PERMITTED UNDER GAAP:
Current Rate MethodTemporal Method
Choice based on Functional Currency of the foreign
operation.
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FUNCTIONAL CURRENCY:The currency of the environment
in which the entity primarily generates and expends cash.
[In highly inflationary economies, the Functional Currency must be
the US dollar].
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