Chat with AIExam 11: Translation Exposure
Most countries specify the translation method to be used by a foreign subsidiary based on its business operations or the functional currency. Explain both subsidiary characterization criteria and the one adopted in the United States.
(69) 
VerifiedA foreign subsidiary's business can be categorized as either an integrated foreign entity or a self-sustaining foreign entity. An integrated foreign entity is one that operates as an extension of the parent company, with cash flows and general business lines that are highly interrelated with those of the parent. A self-sustaining foreign entity is one that operates in the local economic environment independent of the parent company. The differentiation is important to the logic of translation. A foreign subsidiary should be valued principally in terms of the currency that is the basis of its economic viability. It is not unusual for a single company to have both types of foreign subsidiaries, integrated and self-sustaining.
A foreign subsidiary's functional currency is the currency of the primary economic environment in which the subsidiary operates and in which it generates cash flows. In other words, it is the dominant currency used by that foreign subsidiary in its day-to-day operations. It is important to note that the geographic location of a foreign subsidiary and its functional currency may be different.
The United States, rather than distinguishing a foreign subsidiary as either integrated or self-sustaining, requires that the functional currency of the subsidiary be determined. Management must evaluate the nature and purpose of each of its individual foreign subsidiaries to determine the appropriate functional currency for each. If a foreign subsidiary of a U.S.-based company is determined to have the U.S. dollar as its functional currency, it is essentially an extension of the parent company (equivalent to the integrated foreign entity designation used by most countries). If, however, the functional currency of the foreign subsidiary is determined to be different from the U.S. dollar, the subsidiary is considered a separate entity from the parent (equivalent to the self-sustaining entity designation).
One possible reason for a balance sheet hedge could be because the foreign subsidiary is about to be liquidated, so that value of its Cumulative Translation Adjustment (CTA) would be realized.
(76) VerifiedTrue
Under U.S. accounting and translation practices, use of the current rate method is termed ________ while use of the temporal method is termed ________.
(80) VerifiedB
Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
(71) If management expects a foreign currency to depreciate, it could minimize translation exposure by increasing net exposed assets.
(83) The main technique to minimize translation exposure is called a/an ________ hedge.
(84) Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity.
(90) Translation gains or losses can be quite different from operating gains or losses not only in magnitude but also in sign.
(86) The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods. Briefly, describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements. Identify when each technique should be used and the major advantage(s) of each.
(86) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the local currency is the functional currency, then:
(76) Gains or losses caused by translation adjustments when using the current rate method are reported separately on the:
(69) According to your authors, the main purpose of translation is:
(80) ________ gains and losses are "realized" whereas ________ gains and losses are only "paper."
(69) The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.
(74) Under U.S. accounting and translation practices, use of the current rate method is termed "translation" while use of the temporal method is termed "remeasurement."
(67) Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not.
(87) The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.
(87) Under the U.S. method of translation procedures, if the financial statements of the foreign subsidiary of a U.S. company are maintained in the local currency, and the U.S. dollar is the functional currency, then:
(79) Generally speaking, translation methods by country define the translation process as a function of what two factors?
(80) 
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