Financial Analysis #20 - Multinational Operations Flashcards Preview

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Flashcards in Financial Analysis #20 - Multinational Operations Deck (5)
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1
Q

translation exposure (def. and process)

A

LOS 20.b

Translation of foreign currency finanical statements:

  • converting the accounts of foreign subsidiaries to parent firm’s reporting currency i.e. “presentational currency”
  • three-step process:
    1. Identify subsid. functional currency
    2. convert foreign currency balances into functional currency
    3. convert functional currency balances into parent’s reporting currency using closing rates (if functional and reporting currencies differ)
2
Q

foreign currency translation definitions (SFAS 52)

A

LOS 20.a

  • functional currency - currency of the primary economic environment in which the firm does business. (i.e. spends and generates cash); some subjectivity
  • presentational currency - currency in which the multi-national firm prepares its final FS
  • local currency - currency of the country in which the foreign subsidiary is located
3
Q

foreign currency denominated transactions (including sales)

A

LOS 20.b

On the IS:

  • at transaction date: measured in reporting (presentational) currency at the spot rate
  • at BS date (if before settle date): forex gain (loss) recognized
  • at settlement date: forex gain (loss) recognized
    • if after BS date: additional forex gain (loss) recognized

NOTE: gain/loss recognition is not standardized; potential comparison issues

4
Q

exchange rate definitions

A

LOS 20.d

  • current rate = forex rate as of BS date (closing date)
  • average rate = average forex rate over reporting period
  • historical rate = forex rate that existed when a particular transaction occured:
    • not fixed in time e.g. rate when stock was issued
5
Q

temporal method

A

LOS 20.c,d

Temporal Method

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