TRANSLATION OF FOREIGN

CURRENCY FINANCIAL STATEMENTS

When a U.S. company prepares its financial statements, it must include its foreign-based operations:a) measured in US dollarsb) reported using GAAP

The foreign operations may be:a) subsidiariesb) branchesc) other investments of the US firm

OBJECTIVE OF TRANSLATION PROCESS:

Provide information that shows the expected impact of exchange

rate changes on the US company’s cash flows and equity.

STEPS IN THE TRANSLATION PROCESS:Receive financial statements of foreign subsidiary (reported in a foreign currency).Restate to conform to GAAP (on worksheet).Translate amount in each account into US $.Consolidate the translated accounts with

the parent’s accounts.

METHODS OF TRANSLATION PERMITTED UNDER GAAP:

Current Rate MethodTemporal Method

Choice based on Functional Currency of the foreign

operation.

FUNCTIONAL CURRENCY:The currency of the environment

in which the entity primarily generates and expends cash.

[In highly inflationary economies, the Functional Currency must be

the US dollar].

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