跨国金融原理(第三版)教师手册M11_MOFF9242_03_IM_C.pdf

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1、Chapter 11 Translation Exposure 1.By Any Other Name.What does the word translation mean?Why is translation exposure sometimes called accounting exposure?Translation refers to the process by which the financial statements of separately incorporated subsidiaries are added to the financial statements o

2、f a parent in order to prepare a consolidated financial statement that will reflect the economic reality of the entire enterprise,rather than just the financial status of one separately-incorporated segment.Consolidation of domestic subsidiaries(same country as parent)is simple because only one curr

3、ency is involved.The financial statements of subsidiaries of a multinational enterprise(MNE)are kept in other currencies,so consolidation involves adjusting each year for changes in the value of those separate currencies.The process of restating the foreign currency financial statements of a foreign

4、 subsidiary is called translation.Because translation occurs as a result of the accounting process,the restatement is most often called“accounting.”Because exchange rates change from one time period to another,imbalances occur.These imbalances may cause an accounting-derived gain or loss,which is ta

5、ken into the equity section of the parents consolidated statement.The possibility of gain or loss gives rise to the word“exposure.”2.Converting Financial Assets.In the context of preparing consolidated financial statements,are the words translate and convert synonyms?They are not synonyms.To transla

6、te is to express the value of a financial account(assets,liability,revenue,or expense)originally measured in one currency in another currency.Translation is pure measurement;no transaction is involved.To convert is to engage in a transaction in which an asset or liability originally measured in one

7、currency is physically exchanged for as asset or liability measured in another currency.Exchanging pounds sterling for dollars in the foreign exchange market is converting sterling into dollars.Swapping yen-denominated debt for dollar-denominated debt is converting the debt from one currency to anot

8、her.3.The Central Problem.What is the central problem involved in consolidating the financial statements of a foreign subsidiary?The central problem arises from the fact that exchange rates change from one time period to another,combined with the accounting tradition that accounts are supposed to be

9、 kept on a historic cost basis.The value in the parents home currency of assets and liabilities measured on a historic cost basis in a foreign currency is not clear if the exchange rate has changed.Different countries have different rules on how to treat the discrepancy that arises when exchange rat

10、es change.Chapter 11 Translation Exposure 47 4.Self-Sustaining Subsidiaries.What is the difference between a self-sustaining foreign subsidiary and an integrated foreign subsidiary?A self-sustaining foreign subsidiary is an entity that operates in the local economy more or less independently of its

11、parent.To a large degree its operations,including purchasing,production,and sales,are tied into the local economy;and the entity could probably operate on its own without foreign-parent ownership.An example would be the operations of Shell Petroleum in the United States;although owned by a DutchBrit

12、ish parent,the U.S.operations of Shell in refining and transporting stand pretty much on their own.(Most of Shells petroleum stations in the United States are owned by local operators.)An integrated foreign subsidiary is one that operates as an extension of the parents operations,with cash flows and

13、 general business lines highly integrated into those of the parent.An example would be a Ford Motor Company plant that manufactures automobile transmissions in France,with the transmissions shipped only to Ford assembly lines around the world.5.Functional Currency.What is a functional currency?What

14、is a nonfunctional currency?A functional currency is the currency of the primary economic environment in which a subsidiary operates and in which it generates cash flows.As a general matter the functional currency of self-sustaining foreign entities is their local currency,whereas the functional cur

15、rency of an integrated foreign entity is usually the currency of the parent.Insofar as the authors know,there is no such thing as a nonfunctional currency.However,one might consider the currencies of countries with extremely high rates of inflation as being“nonfunctional,”in that they fail to act as

16、 a dependable medium of exchange,measure of value,or store of value.6.Translating Assets.What are the major differences in translating assets between the current rate method and the temporal method?Under the current rate method,all assets are translated at the exchange rate in effect on the date tha

17、t the accounts are translated.Under the temporal method,monetary assets(cash,marketable securities,and accounts receivable)are translated(accountants prefer the technical term remeasured)at the current exchange rate,but inventory and fixed assets are translated at the exchange rate that was in effec

18、t at the time that the asset was acquired.(Exceptions exist where the local inflation rate exceeds 100%over a three-year period.)7.Translating Liabilities.What are the major differences in translating liabilities between the current rate method and the temporal method?Under both the current rate met

19、hod and the temporal method all liabilities(but not equity accounts)are translated at the current exchange rate.The two methods do not differ in the manner in which they translate liabilities.8.Hyperinflation.What is hyperinflation and what are the consequences for translating foreign financial stat

20、ements?Hyperinflation is,by definition,a“very high and rapid monetary inflation,or the period during which this occurs”(Encarta World English Dictionary).The prefix,hyper,means“over,beyond,over much,above measure”(The Shorter Oxford English Dictionary on Historical Principles).In the context of prac

21、tical international accounting for multinational companies,hyperinflation is deemed to exist when accumulated inflation is 100%or more over a three-year period.48 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition 9.Foreign Exchange Losses by Any Other Name.What is the pri

22、mary difference between losses from transaction exposure,operating exposure,and translation exposure?Losses from transaction exposure are cash losses incurred in the near-term because of a change in the amount of cash to be received or paid on account of already-existing receivables or payables.The

23、focus is on a loss from an already-existing balance sheet account.These are“realized”losses and therefore can be deducted from income for tax purposes.Losses from operating exposure are potential cash losses that will probably be incurred at some time in the future because of changes in future expen

24、ses,revenues,or sales volume that result from an unexpected exchange rate change.The focus is on a loss from future income statement accounts.Losses from translation exposure are changes in the size of the equity section of a parent company issuing consolidated financial statements that result from

25、a change in how foreign subsidiary financial statements are measured for translation purposes.As such,losses from translation exposure are not cash losses.The focus is on translation(“remeasurement,if you prefer)of both balance sheet and income statement accounts.10.Reacting to Potential Losses.How

26、should financial managers react to any differences between potential losses from operating exposure and translation exposure?Financial managers should first address the question of protecting the firm from losses due to operating exposure because these are probable future cash losses and thus affect

27、 the value of the firm.After operating exposure is dealt with,financial managers should then consider whether or not they wish to deal with translation exposure,and if so,what to do.The logic of this sequence is that future cash flows are more important to the value of the firm than are noncash acco

28、unting losses.Additionally,protecting against operating exposure may increase or decrease future translation exposure,and vice versa.Notwithstanding the above logic,many financial managers address translation exposure losses first in the belief that investors are guided more by reported earnings tha

29、n by the more nebulous expected future cash flows.11.Trident and a Strong Dollar.During the year ahead the U.S.dollar is expected to appreciated vis vis the euro.How might this affect the reported consolidated earnings of Trident and its operating subsidiary in Germany?An appreciation of the dollar

30、is the same as a weakening of the euro.Tridents German subsidiary with its euro-denominated earnings would find those earnings translated into fewer dollars.Consequently,Tridents consolidated earnings would decrease from this effect.Nevertheless if the weakened euro led to an offsetting increase in

31、volume in Tridents German subsidiary,unmatched by increasing costs,the German subsidiary might earn and report more.This would be an instance where Tridents gain from operating exposure more than offset its loss from translation exposure.Chapter 11 Translation Exposure 49 12.Trident and a Weak Dolla

32、r.During the year ahead the U.S.dollar is expected to weaken vis vis the euro.How might this affect the reported consolidated earnings of Trident and its operating subsidiary in Germany?A weakening of the dollar is the same as an appreciation of the euro.Tridents German subsidiary with its euro-deno

33、minated earnings would find those earnings translated into more dollars.Consequently,Tridents consolidated earnings would increase from this effect.Nevertheless,if the strengthened euro led to an offsetting decrease in volume in Tridents German subsidiary,unmatched by decreased costs,the German subsidiary might earn and report less.This would be an instance where Tridents loss from operating exposure more than offset its gain from translation exposure.