Exam 11: Translation Exposure

It is possible to use different exchange rates for different line items on a financial statement.

If the European subsidiary of a U.S. firm has net exposed assets of €200,000, and the euro increases in value from $1.22/€ to $1.26/€ the U.S. firm has a translation:

Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.

Gains or losses caused by translation adjustments when using the current rate method are reported separately on the:

Under U.S. accounting and translation practices, use of the current rate method is termed ________ while use of the temporal method is termed ________.

The ________ determines accounting policy for U.S. firms.

If management anticipates an appreciation of the foreign currency, it should decrease net exposed assets to benefit from a gain.

If an imbalance results from the accounting method used for translation, the imbalance is taken either to ________ or ________.

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then:

The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.

A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a:

Translation gains or losses can be quite different from operating gains or losses not only in magnitude but also in sign.

Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.

Which of the following primary principles of U.S. translation procedures in NOT true?

: The current rate method and the temporal method are two basic methods for translation that are employed worldwide

If the British subsidiary of a European firm has net exposed assets of £250,000, and the pound drops in value from €1.35/£ to €1.30/£, the European firm has a translation:

Generally speaking, translation methods by country define the translation process as a function of what two factors?

It is highly unusual for a multinational firm to have both integrated foreign entities AND self-sustaining foreign entities.

It is possible that efforts to decrease translation exposure may result in an increase in transaction exposure.

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method.