CHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURE
SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nonmonetarymethodandthetemporalmethod.
2.Howaretranslationgainsandlosseshandleddifferentlyaccordingtothecurrentratemethodincomparisontotheotherthreemethods,thatis,thecurrent/noncurrentmethod,themonetary/nonmonetarymethod,andthetemporalmethod
3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfunctionalcurrencywouldbethesameastheparentfirm’scurrency.
Answer:ThreeexamplesunderFASB52,wheretheforeignentity’sfunctionalcurrencywillbethesameastheparentfirm’scurrency,are:i)theforeignentity’scashflowsdirectlyaffecttheparent’scashflowsandarereadilyavailableforremittancetotheparentfirm;ii)thesalespricesfortheforeignentity’sproductsareresponsiveonashort-termbasistoexchangeratechanges,wheresalespricesaredeterminedthroughworldwidecompetition;and,iii)thesalesmarketisprimarilylocatedintheparent’scountryorsalescontractsaredenominatedintheparent’scurrency.
4.DescribetheremeasurementandtranslationprocessunderFASB52ofawhollyownedaffiliatethatkeepsitsbooksinthelocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanitsfunctionalcurrency.
Answer:Foraforeignentitythatkeepsitsbooksinitslocalcurrency,whichisdifferentfromitsfunctionalcurrency,thetranslationprocessaccordingtoFASB52isto:first,remeasurethefinancialreportsfromthelocalcurrencyintothefunctionalcurrencyusingthetemporalmethodoftranslation,andsecond,translatefromthefunctionalcurrencyintothereportingcurrencyusingthecurrentratemethodoftranslation.
5.Itis,generally,notpossibletocompletelyeliminatebothtranslationexposureandtransactionexposure.Insomecases,theeliminationofoneexposurewillalsoeliminatetheother.Butinothercases,theeliminationofoneexposureactuallycreatestheother.Discusswhichexposuremightbeviewedasthemostimportanttoeffectivelymanage,ifaconflictbetweencontrollingbotharises.Also,discussandcritiquethecommonmethodsforcontrollingtranslationexposure. Answer:Sinceitis,generally,notpossibletocompletelyeliminatebothtransactionandtranslationexposure,werecommendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslationprocess,on-the-otherhand,hasnodirecteffectonreportingcurrencycashflows,andwillonlyhavearealizableeffectonnetinvestmentuponthesaleorliquidationoftheassets.
PROBLEMS
Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues. ReportingCurrencyImbalance=
- �3,949,0000 - �3,949,0000
- = $239,415.
�1.1786/ $1.00 �1.1000/ $1.00
鍥介檯璐㈠姟绠＄悊璇惧悗涔犻绛旀chater - 鐧惧害鏂囧簱
