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Amy Stewart, Ellie Costa-Sa and Lewis Jeffrey

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Amy Stewart, Ellie Costa-Sa and Lewis Jeffrey

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John McKenzie

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Arran Trew

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Jake Blair, Lewis Kerr- Rogers, Daniel Burns, Hans Potigadoo

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Jake Blair, Lewis Kerr- Rogers, Daniel Burns, Hans Potigadoo

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- What is the appropriate rate to use when translating an asset/liability denominated in a foreign currency?
- How should one account for the gain or loss that arises when exchange rate changes?

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The current method, used when the subsidiary and parent use the same currency. Assets liabilities are translated at the current (closing) rate. Share capital are reported at the historical rate. P&L items either reported at average rate for financial year or the closing rate. Gains & Losses taken to reserves section in balance sheet.

Current/non-current method, assets liabilities are translated at closing rate, all non assets and liabilities are converted at historic rate. P&L items consolidated using average rate with the exception of COS and depn consolidated at historic rate.

Translating currencies make it difficult for investors to work out the trading performance of the company from the consolidated accounts due to the movement in foreign currency translation. Ratio's of the company can change particularly ones that use profit when the temporal method is used.

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Jordan Notman
Tasha McGlynn
Diana Karlins

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too much variation in exchange rate according to different methods used. Lack of consistency when stating in the financial statements relating to specific rates for items. For example, non-monetary items such as inventory use historic rate whereas monetary items such as cash use closing rate.

There can be a loss or gain from exchanging currencies which causes the issue to arise about who should take on this loss or gain. For example, the strength of yen impacted the export of Honda cars to the US as their US operations were worth less yen due to the strengthening of yen compared to the weakening of dollars.

Problems occur in consolidation when foreign subsidiary states  its non-monetary assets on a basis other than parents. The differing methods make it much harder to consolidate.

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Compare and contrast the “translation of transactions” with “translation of financial statements”

The translation of transactions – the recording of transactions denominated in foreign currency in the books of an individual company, and the subsequent preparation of the financial statements of that company from these books of account

Transaction recorded initially by applying the historical rate (spot rate at date transaction took place). Problems include how to report transactions at a subsequent financial statement date, should resulting assets or liabilities be reported at the closing rate or historic rate- ideally they should be the same to avoid confusion.

The translation of financial statements – the preparation of the consolidated financial statements of a group of companies, where the financial statements of the parent company and those of one or more of its subsidiaries are not denominated in the same currency

Various methods can be used such as:

Closing (current) rate- IASB/ FASB

Monetary/ non monetary- old

Current/ non- current- old

Temporal- US creation, not so common now

There are conflicts between so many methods that can be used: how do you know in a multinational corporation which method is being used, are they using the same method throughout, if you change methods in the future you have higher admin/ increased expenditure because you have to reference that you have changed methods.

As the closing rate is the easiest to apply/ simplest and most commonly used then there should be a move to just using one method instead of having the choice of four- would make the whole argument of confusion/ more work surrounding choosing methods void.