R.16 - Multinational Operations

Question 1

Multinationals

Ratio and Statement Comparisons of

Original vs Translated

(3 key points, ratio table)

Answer 1

Remember:

1. Pure B/S and Pure I/S ratios will be the same. Mixed ratios (I/S num and B/S denom) present the challenges.
2. Attached scenarios is Appreciating Local currency (more Yen for 1 USD) that shows Temporal translation values relative to Original/Current Rate values.
3. If local currency is depreciating, then just reverse higher and lower values!

Question 2

Multinationals

Current Rate Method Steps

Answer 2

Question 3

Multinationals

Integrated vs Independent Subs

Answer 3

Integrated » $USD functional currency. High inflation locally makes integration more likely.

Independent sub » ¥ Local currency functional

Question 4

Multinationals

Temporal Method and Current Rate Method

(Notable comparative categories and applicable differences)

Answer 4

B/S

Assets and Liabilities?

Nonmonetary assets/liabilities?

Common stock?

Equity (taken as a whole)?

I/S

Revenues and SG&A?

COGS?

Deprec and Amort?

NI?

Exposure?

Exchange rate gain or loss?

Question 5

Multinationals

Temporal Method Steps

Answer 5

Question 6

Presentation and Functional Currencies

Answer 6

Presentation and Functional Currencies

• *Presentation currency:** Currency in which company presents its financial statements
• *Functional currency:** Currency in which the company conducts its primary activity.
• *Local currency:** Used within the country in which the company operates.

Often, presentation currency = functional currency = local currency.
Often, functional currency of subsidiary ≠
functional and presentation currency of parent.

Question 7

Remeasurement/Translation Methods

(AP formula sheet)

Answer 7

Remeasurement/Translation Methods

• *Current rate method**
• Use when the subsidiary’s functional currency is different from the parent’s functional currency
• Exchange rate gain/loss reported in shareholders’ equity as part of cumulative translation adjustment (CTA)
• Exposure is net assets (assets minus liabilities)
• *Temporal method**
• Use when the subsidiary’s functional currency is the same as the parent’s functional currency
• Remeasurement gain/loss reported in income statement
• Exposure is net monetary assets (monetary assets minus monetary liabilities)