This case represents the ongoing debate as to the proper reporting of foreign currency balances.Southwestern has invested the equivalent of $30,000 (150,000 vilseks) in each of three assets. Therelative value of the vilsek has now changed. Thus, 150,000 vilseks now can be converted into$34,500. However, the subsidiary does not have vilseks--only land, inventory, and investments.Although the current exchange rate is given, the company has no apparent plans to convert itsassets into dollars. Instead, these three assets are being held, each with a historical cost of150,000 vilseks. Under the temporal method, these assets (except for the investments if carried atmarket value) would be reported in the parent's balance sheet at the original cost of $30,000.
Unfortunately, as the Finance Director points out, an old, outdated rate is being utilized if the$30,000 figure is reported. (Of course, given that prices tend to change over time, the same can besaid for any asset reported at historical cost.)
Conversely, the current rate method requires that each of the three assets be reported at $34,500based on the current exchange rate. As the controller indicates, though, $34,500 was not theoriginal cost expended by Southwestern. In addition, using the current rate means that each of theassets will constantly report a "floating" value, one that will change with each exchange ratefluctuation. Finally, the $34,500 figure is based on the current value of the vilsek ($.23) and thehistorical cost in vilseks (150,000 vilseks) for the three assets. The current exchange rate is onlysignificant if the assets are sold with the proceeds being converted into U.S. dollars. Since animminent sale is not indicated, the validity of reporting the $34,500 might again be questioned. Inaddition, even if the assets were sold, $34,500 does not accurately reflect the proceeds in U.S.dollars because 150,000 vilseks is the historical cost and not the current market value of each of
these assets.
As a classroom exercise or written assignment, students could be required to select a reportedvalue for each of the three assets and then defend their position. What figure is actually the fairestrepresentation of each of the three assets? What figure is the best conveyor of information to anoutside party? There is no single best answer to these questions. The purpose of this type ofexercise is to force students to consider the objectives of financial reporting. Students should not just assume that the current official pronouncement is correct. One possible approach to the case isto assign several students to represent banks or stockholders and discuss the types of informationthat is most needed by these users. Another group of students can take the position of the companyresponsible for preparing the information and discuss management's preference for providing onetype of information over another. Yet another group could take a purely theoretical approach anddiscuss the goals that accounting has attempted to reach. Although a final resolution may not beachieved, some excellent class discussion is possible.
The temporal and current rate methods of translation differ primarily with regard to the exchangerate used to translate those assets that are reported at historical cost--inventories, prepaids, fixedassets, and intangibles. The debate regarding the appropriate exchange rate for translating assetsexists only because some assets are reported at historical cost. If all assets were reported at theircurrent value, there would be no need to use the historical exchange rate for translating assets inorder to maintain the asset's historical cost in U.S. dollar terms. All assets would be translated atthe current exchange rate. The differences between the temporal method and current rate methodwould disappear.
1. The two major issues related to the translation of foreign currency financial statements are: (a)which method should be used and (b) where should the resulting translation adjustment bereported in the consolidated financial statements. The first issue relates to determining theappropriate exchange rate (historical, current, or average for the current period) for thetranslation of foreign currency balances. Those items translated at the current exchange rateare exposed to translation adjustment. The second issue relates to whether the translationadjustment should be treated as a gain or loss in income, or should be deferred as a separatecomponent of stockholders’ equity.
2. Balance sheet exposure arises when a foreign currency balance is translated at the currentexchange rate. By translating at the current exchange rate, the foreign currency item in essenceis being revalued in U.S. dollar terms on the consolidated financial statements. There will beeither a net asset balance sheet exposure or net liability balance sheet exposure dependingupon whether assets translated at the current rate are greater or less than liabilities translated atthe current rate. Balance sheet exposure generates a translation adjustment which does notresult in an inflow or outflow of cash. Transaction exposure, which results from the receipt orpayment of foreign currency, generates foreign exchange gains and losses which are realized incash.
3. Although balance sheet exposure does not result in cash inflows and outflows, it doesnevertheless affect amounts reported in consolidated financial statements. If the foreigncurrency is the functional currency, translation adjustments will be reported in stockholders’equity. If translation adjustments are negative and therefore reduce total stockholders’ equity,there is an adverse (inflationary) impact on the debt to equity ratio. Companies with restrictivedebt covenants requiring them to stay below a maximum debt to equity ratio, may find itnecessary to hedge their balance sheet exposure so as to avoid negative translationadjustments being reported. If the U.S. dollar is the functional currency or an operation is locatedin a high inflation country, remeasurement gains and losses are reported in income. Companiesmight want to hedge their balance sheet exposure in this situation to avoid the adverse impactremeasurement losses can have on consolidated income and earnings per share.
The paradox in hedging balance sheet exposure is that, by agreeing to receive or deliver foreigncurrency in the future under a forward contract, a transaction exposure is created. Thistransaction exposure is speculative in nature, given that there is no underlying inflow or outflowof foreign currency that can be used to satisfy the forward contract. By hedging balance sheetexposure, a company might incur a realized foreign exchange loss to avoid an unrealizednegative translation adjustment or unrealized remeasurement loss.
4. The gains and losses arising from financial instruments used to hedge balance sheet exposureare treated in a similar manner as the item the hedge is intended to cover. If the foreign currencyis the functional currency, gains and losses on hedging instruments will be taken to othercomprehensive income. If the U.S. dollar is the functional currency, gains and losses on thehedging instruments will be offset against the related remeasurement gains and losses.
5. The major concept underlying the temporal method is that the translation process should resultin a set of translated U.S. dollar financial statements as if the foreign subsidiary’s transactionshad actually been carried out using U.S. dollars. To achieve this objective, assets carried athistorical cost and stockholders’ equity are translated at historical exchange rates; assets carriedat current value and liabilities (carried at current value) are translated at the current exchangerate. Under this concept, the foreign subsidiary’s monetary assets and liabilities are considered
to be foreign currency cash, receivables, and payables of the parent which are exposed totransaction risk. For example, if the foreign currency appreciates, then the foreign currencyreceivables increase in U.S. dollar value and a gain is recognized. Balance sheet exposureunder the temporal method is analogous to the net transaction exposure which exists fromhaving both receivables and payables in a particular foreign currency.
The major concept underlying the current rate method is that the entire foreign investment isexposed to foreign exchange risk. Therefore all assets and liabilities are translated at thecurrent exchange rate. Balance sheet exposure under this concept is equal to the netinvestment.
6. The Retained Earnings balance is created by a multitude of transactions: all revenues,expenses, gains, losses, and dividends since the company’s inception. Identifying each
component of this account (so that a separate translation can be made) would be virtuallyimpossible. Therefore, in the initial year that Statement 52 was applied, the ending balancecalculated under Statement 8 was merely brought forward. Thereafter, the ending balancetranslated each year for retained earnings becomes the beginning figure to be reported for thefollowing year.
7. The major differences relate to non-monetary assets carried at historical cost and relatedexpenses, i.e., inventory and cost of goods sold; property, plant, and equipment anddepreciation expense; and intangible assets and amortization expense. Under the temporalmethod, these items are all translated at historical exchange rates. Under the current ratemethod, the assets are translated at the current exchange rate and the related expenses aretranslated at the average exchange rate for the current period.
8. The functional currency is the currency of the subsidiary’s primary economic environment. It is
usually identified as the currency in which the company generates and expends cash. SFAS 52 recommends that several factors such as the location of primary sales markets, sources ofmaterials and labor, the source of financing, and the amount of intercompany transactionsshould be evaluated in identifying an entity’s functional currency. SFAS 52 does not provide anyguidance as to how these factors are to be weighted (equally or otherwise) when identifying anentity’s functional currency.
9. The foreign subsidiary's net asset position in foreign currency at the beginning of the period isfirst determined. Changes in net assets are determined to explain the net asset balance inforeign currency at the end of the period. The beginning net asset position and changes in netassets are translated at appropriate exchange rates and the ending net asset position in dollarsis determined.
The ending net asset balance in foreign currency is then translated at the current rate and this
result is subtracted from the ending net asset position in dollars (already calculated). Thedifference is the translation adjustment. It is positive if the actual dollar net asset position is lessthan the net asset position based on the current exchange rate. The translation adjustment isnegative if the actual dollar net asset position is greater than if translated at the current rate.
10. One theory mentioned by the FASB identifies the translation adjustment as a measure ofunrealized increases and decreases that have occurred in the value of the foreign subsidiarybecause of exchange rate changes. A second theory argues that this adjustment is no morethan a mechanically derived number that must be included to keep the balance sheet inequilibrium although the figure has no intrinsic meaning. The FASB did not indicate inStatement 52 that either theory is considered more appropriate.
11. Remeasurement is required in two situations:
a. The U.S. dollar is the functional currency.b. The foreign subsidiary operates in a highly inflationary country.
Translation is required when a foreign currency is the functional currency.Remeasurement is carried out using the temporal method, with remeasurement gains andlosses reported in consolidated income. Translation is done using the current rate method andthe resulting translation adjustment is carried as a separate component of stockholders’ equity.
12. The temporal method must be used to remeasure the financial statements of operations inhighly inflationary countries. One reason for mandating the use of the temporal method is that itavoids the disappearing plant problem that exists when the current rate method is used. Underthe current rate method, fixed assets are translated at current exchange rates. With high rates
of inflation, the foreign currency will depreciate significantly. When the historical cost of fixedassets is translated at a significantly lower current exchange rate, the dollar value of fixed assets“disappears.” This problem is avoided by translating at the historical exchange rate as is doneunder the temporal method.
4. B Because the peso is the functional currency, the financial statements must betranslated using the current rate method. Therefore, answers a and d can beeliminated. Because the subsidiary has a net asset position and the peso hasappreciated from $.16 to $.19, a positive translation adjustment will result.
5. A All asset accounts are translated at current rates.
6. A Because the foreign currency is the functional currency, a translation is
required. All assets accounts are translated at current rates.
7. C Because the U.S. dollar is the functional currency, a remeasurement isrequired. All receivables are remeasured at current rates. Assets carried athistorical cost, such as prepaid insurance and goodwill, are remeasured athistorical rates.
8. B The foreign currency is the functional currency, so a translation isappropriate. All assets (including inventory) are translated at the currentexchange rate [100,000 x $.17].
9. C Cost of goods sold is translated at the exchange rate in effect at the date of
accounting recognition, which is the date the goods were sold [100,000 x$.18].
10. D The foreign currency is the functional currency, so a translation isappropriate. All assets are translated at the current exchange rate of $.19.
11. C The U.S. dollar is the functional currency, so a remeasurement is appropriate.Inventory (carried at cost) is remeasured at the historical exchange rate of
$.16. Marketable equity securities (carried at market value) are remeasured atthe current exchange rate of $.19.
12. C Beginning inventory FCU 200,000 x $1.00 = $ 200,000Purchases 10,300,000 x $0.80 = 8,240,000Ending inventory (500,000) x $0.75 = (375,000)Cost of goods sold FCU 10,000,000 $8,065,000
13. C Beginning net assets, 1/1………….. P20,000 x $.15 = $ 3,000Increase in net assets:
Income ........................................ 10,000 x $.19 = 1,900Ending net assets, 12/31 ................. P30,000 $ 4,900Ending net assets at
current exchange rate ................ P30,000 x $.21 = $ 6,300
Translation Adjustment (positive) . $(1,400)
14. C By translating items carried at historical cost by the historical exchange rate,the temporal method maintains the underlying valuation method used by theforeign subsidiary.
15. A Beginning net monetary assets, 1/1 P100,000 x $.16 = $16,000Increases in net monetary assets:
Sale of inventory ........................ 50,000 x $.20 = 10,000Decreases in net monetary assets:
Purchase of equipment ............. (60,000) x $.16 = (9,600)Purchase of inventory ................ (30,000) x $.18 = (5,400)
Transfer to parent ...................... (10,000) x $.21 = (2,100)Ending net monetary assets, 12/31 P 50,000 $ 8,900Ending net monetary assets at
the current exchange rate ......... P 50,000 x $.22 = (11,000)Remeasurement gain ...................... $(2,100)
16. C Marketable equity securities are carried at market value and thereforetranslated at the current exchange rate under the temporal method.
17. B When the U.S. dollar is the functional currency, SFAS 52 requiresremeasurement using the temporal method with remeasurement gains andlosses reported in income.
18. B Wages payable is translated at the current exchange rate.
19. C Gains and losses on hedges of net investments (whether through a forwardcontract, borrowing, or other technique) are offset against the translationadjustment being hedged.
20. D Remeasurement gains are reported in the income statement as a part ofincome from continuing operations.
21. (10 minutes) (Specify appropriate rates for a translation)
Rent expense— use actual (historical) rate at time of recording. Rent expensewould often be recorded evenly throughout the year so that an average rate forthe period is acceptable.
Dividends paid— use historical rate at time of recording, the date of declaration.
Equipment— as an asset, use current rate at the balance sheet date.
Notes payable— as a liability, use current rate at the balance sheet date.
Sales— use actual (historical) rate at time of recording. Sales often occurevenly throughout the year so that an average rate is acceptable. However, ifsales are more prevalent at a particular time during the year, historical ratesshould be used.
Depreciation expense— use historic rate at time of recording. In most cases,average rate for the year is acceptable, because depreciation occurs evenlythroughout the year. Depreciation is recorded at year-end only as a matter ofconvenience.
Cash— as an asset, use the current rate at the balance sheet date.
Accumulated depreciation— as a contra-asset account, use the current ex-change rate at the balance sheet date.
Common stock —as an equity account, use historic rate at time of recording, the
date of issuance.
22. (5 minutes) (Determine translated values)
As a translation, both the asset (inventory) and the liability (accounts payable)utilize the current exchange rate at the balance sheet date (December 31). Thus,the translated values are as follows:
Inventory LCU120,000 x 25% left = LCU30,000 x 1/3.0 = $10,000Accounts payable LCU120,000 x 40% unpaid = LCU48,000 x 1/3.0 = $16,000
23. (10 minutes) (Determine translation and remeasurement rates)
Translation Remeasurement Accounts payable $.16 C $.16 C
Accounts receivable $.16 C $.16 CAccumulated depreciation $.16 C $.26 HAdvertising expense $.19 A $.19 AAmortization expense $.19 A $.25 HBuildings $.16 C $.26 HCash $.16 C $.16 CCommon stock $.28 H $.28 HDepreciation expense $.19 A $.26 HDividends paid (10/1) $.20 H $.20 HNotes payable $.16 C $.16 CPatents (net) $.16 C $.25 H
Salary expense $.19 A $.19 ASales $.19 A $.19 A
* C = current rate, H = historical rate, A = average rate
24. (20 minutes) (Calculate translation adjustment and remeasurement gain/loss andexplain their economic relevance)
The translation adjustment and remeasurement gain/loss can be determined asthe plug figure that keeps the dollar balance sheet in balance:
Translation Remeasurement
CHF Rate US$ Rate US$Cash ........................... 500,000 $.75 C 375,000 $.75 C 375,000Inventory .................... 1,000,000 $.75 C 750,000 $.70 H 700,000Fixed assets............... 3,000,000 $.75 C 2,250,000 $.70 H 2,100,000Total assets .............. 4,500,000 3,375,000 3,175,000
Notes payable ............ 800,000 $.75 C 600,000 $.75 C 600,000Owners equity ........... 3,700,000 $.70 H 2,590,000 $.70 H 2,590,000Translation adjustment 185,000Retained earnings(remeasurement loss) (15,000)Total ......................... 4,500,000 3,375,000 3,175,000
Alternatively, the translation adjustment and remeasurement loss can be
calculated by analyzing the subsidiary’s balance sheet exposure:
Translation Beginning net assets, 12/1 CHF3,700,000 x $.70 = $2,590,000Ending net assets, 12/31 at
current exchange rate CHF3,700,000 x $.75 = (2,775,000)Translation adjustment (positive) $( 185,000)
Remeasurement Beginning net monetary
liability position, 12/1 CHF(300,000) x $.70 = $(210,000)Ending net monetary liability
position, 12/31 at currentexchange rate CHF(300,000) x $.75 = (225,000)Remeasurement loss $ 15,000
Economic Relevance of Translation AdjustmentThe translation adjustment increases stockholders’ equity by $185,000. The positivetranslation adjustment arises because the Swiss subsidiary has a net asset position ofCHF3,700,000 and the Swiss franc appreciates by $.05 [CHF3,700,000 x $.05 = $185,000].The positive translation adjustment is not realized in terms of dollar cash flow. Itwould be a realized gain only if Stephanie sold this operation on December 31 forexactly CHF3,700,000 and converted the sales proceeds into dollars at the currentexchange rate of $.75 per Swiss franc.
Economic Relevance of Remeasurement LossThe remeasurement loss arises because the Swiss subsidiary has a net monetaryliability position of CHF300,000 (Cash of CHF500,000 less Notes payable of CHF800,000)and the Swiss franc has appreciated by $.05 [CHF300,000 x $.05 = $15,000]. The loss isunrealized. It would be realized only if the Swiss subsidiary converted its Swiss franccash into dollars at December 31, thereby realizing a transaction gain of $25,000[CHF500,000 x ($.75-$.70)], and the parent paid off the Swiss franc note payable usingU.S. dollars, thereby realizing a transaction loss of $40,000 [CHF800,000 x ($.75-$.70)].(The note could have been paid at December 18 for $560,000 [CHF800,000 x $.70]. AtDecember 31, it takes $600,000 to pay off the note [CHF800,000 x $.75].)
25. (30 minutes) (Prepare financial statements for a foreign subsidiary and thentranslate them into U.S. dollars)
Fenwicke Company Subsidiary
Income StatementLCU U.S. Dollars
Rent revenue 60,000 x $1.90 A = $114,000Interest expense (10,000) x $1.90 A = (19,000)Depreciation expense (14,000) x $1.90 A = (26,600)Repair expense (4,000) x $1.85*H = (7,400)
Net income 32,000 $ 61,000
* Repair expense is the only expense not incurred evenly throughout the year.
Statement of Retained EarningsLCU U.S. Dollars
Retained earnings, 1/1 -0- -0-Net income 32,000 (above) $61,000Dividends paid (5,000) x $1.80 H = (9,000)Retained earnings, 12/31 27,000 $52,000
Balance SheetLCU U.S. Dollars
Cash 41,000 x $1.80 C = $ 73,800Accounts receivable 10,000 x $1.80 C = 18,000Building 140,000 x $1.80 C = 252,000Accumulated depreciation (14,000) x $1.80 C = (25,200)
Total assets 177,000 $318,600Interest payable 10,000 x $1.80 C = $ 18,000Note payable 100,000 x $1.80 C = 180,000Common stock 40,000 x $2.00 H = 80,000Retained earnings 27,000 (above) 52,000Translation adjustment (below) (11,400)
Total liabilities and equities177,000 $318,600
Computation of Translation Adjustment Beginning net assets -0- -0-Increase in net assets:
Issued common stock 40,000 x $2.00 = $ 80,000Net income 32,000 (above) 61,000
Decrease in net assets:
Dividends paid (5,000) x $1.80 = (9,000)Ending net assets 67,000 $132,000Ending net assets at current
26. (30 minutes) (Prepare a statement of cash flows for a foreign subsidiary andthen translate it into U.S. dollars)
Fenwicke Company SubsidiaryStatement of Cash Flows
LCU U.S. Dollars
Operating Activities:Net income 32,000 (from prob 25) $ 61,000plus: depreciation 14,000 x $1.9 A = 26,600less: increase in accounts receivable (10,000) x $1.9 A = (19,000)plus: increase in interest payable 10,000 x $1.9 A = 19,000Cash flow from operations 46,000 87,600
Investing Activities:Purchase of building (140,000) x $2.0 H = (280,000)
Financing Activities:Sale of common stock 40,000 x $2.0 H = 80,000Borrowing on note 100,000 x $2.0 H = 200,000Dividends paid (5,000) x $1.8 H = (9,000)
135,000 271,000Increase in cash 41,000 78,600Effect of exchange rate change on cash (4,800)Cash, 1/1 -0- -0-Cash, 12/31 41,000 x $1.80 C = $ 73,800
27. (25 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Translation—only changes in net assets have an impact on the computation ofthe translation adjustment.
Net asset balance 1/1 KM30,000 x $.32 = $ 9,600Increases in net assets (income):
Sold inventory at a profit 5/1 5,000 x $.34 = 1,700Sold land at a gain 6/1 1,000 x $.35 = 350
Decreases in net assets:Paid a dividend 12/1 (3,000) x $.41 = (1,230)Depreciation recorded (2,000) x $.37 = ( 740)
Net asset balance 12/31 KM31,000 $ 9,680Net asset balance 12/31
at current exchange rate KM31,000 x $.42 = (13,020)Translation adjustment—positive $(3,340)
b. Remeasurement—only changes in net monetary assets and liabilities have animpact on the computation of the remeasurement gain.
Beginning net monetaryliability position KM (3,000) x $.32 = $ ( 960)
Increases in monetary assets:Sold inventory 5/1 15,000 x $.34 = 5,100Sold land 6/1 5,000 x $.35 = 1,750
Decreases in monetary assets:Bought inventory 10/1 (12,000) x $.39 = (4,680)Bought land 11/1 (4,000) x $.40 = (1,600)Paid a dividend 12/1 (3,000) x $.41 = (1,230)
Ending net monetary liabilityposition KM(2,000) $(1,620)Ending net monetary liability position
at current exchange rate KM(2,000) x $.42 = (840)Remeasurement gain $ (780)
Note: The purchase of land on account did not result in a decrease in monetaryassets, rather an increase in monetary liabilities. Payment on the note payableand collection of accounts receivable do not affect the net monetary liabilityposition.
28. (20 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. The translation adjustment is based on changes in the net assets of thesubsidiary.
Net assets, 1/1 82,000 LCU x $.24 = $19,680
Changes in net assetsRendered services 30,000 LCU x $.25 = 7,500Incurred expense (18,000) LCU x $.26 = (4,680)Net assets, 12/31 94,000 LCU 22,500Net assets, 12/31 at
current exchange rate 94,000 LCU x $.29 = 27,260Translation adjustment (positive) $(4,760)
b. The remeasurement gain or loss is based on changes in the net monetary assetsof the subsidiary.
Net monetary assets, 1/1 22,000 LCU x $.24 = $ 5,280
Changes in net monetary assetsRendered services 30,000 LCU x $.25 = 7,500Incurred expense (18,000) LCU x $.26 = (4,680)Net monetary assets, 12/31 34,000 LCU $ 8,100Net monetary assets, 12/31 at
current exchange rate 34,000 LCU x $.29 = 9,860Remeasurement gain $(1,760)
c. Translated value of land 60,000 LCU x $.29 = $17,400Remeasured value of land 60,000 LCU x $.23 = $13,800
29. (10 minutes) (Determine the appropriate exchange rate)
Account (a) Translation (b) RemeasurementSales 20 A 20 AInventory 22 C 19 HEquipment 22 C 13 HRent expense 20 A 20 ADividends 21 H 21 HNotes receivable 22 C 22 CAccumulated depreciation--equipment 22 C 13 HSalary payable 22 C 22 CDepreciation expense 20 A 13 H
C = current exchange rate, A = average exchange rate, H = Historical exchangerate
31. (45 minutes) (Translation and remeasurement of foreign subsidiary trialbalance)
a. Translation of Subsidiary Trial BalanceDebits Credits
Cash…………………………………. 8,000 KQ x 1.62 $12,960
Accounts Receivable…………….. 9,000 KQ x 1.62 14,580Equipment………………………….. 3,000 KQ x 1.62 4,860Accumulated Depreciation……… 600 KQ x 1.62 $ 972Land………………………………… 5,000 KQ x 1.62 8,100Accounts Payable………………… 3,000 KQ x 1.62 4,860Notes Payable…………………….. 5,000 KQ x 1.62 8,100Common Stock…………………… 10,000 KQ x 1.71 17,100Dividends Paid……………………. 4,000 KQ x 1.66 6,640Sales………………………………… 25,000 KQ x 1.64 41,000Salary Expense…………………… 5,000 KQ x 1.64 8,200Depreciation Expense…………… 600 KQ x 1.64 984Miscellaneous Expense…………. 9,000 KQ x 1.64 14,760
Calculation of Translation AdjustmentNet assets, 1/1………………………….. -0- -0-Increase in net assets:
Common stock issued………………. 10,000 KQ x 1.71 $17,100Sales……………………………………. 25,000 KQ x 1.64 41,000
Decrease in net assets:Dividends paid……………………….. ( 4,000) KQ x 1.66 (6,640)Salary expense……………………….. ( 5,000) KQ x 1.64 (8,200)Depreciation expense………………. ( 600) KQ x 1.64 ( 984)
Miscellaneous expense ……………. ( 9,000) KQ x 1.64 (14,760)Net assets, 12/31………………………. 16,400* KQ $27,516Net assets, 12/31 at
current exchange rate……………. 16,400 KQ x 1.62 26,568Translation adjustment (negative) $ 948
* This amount can be verified as ending assets (24,400 KQ) minus endingliabilities (8,000 KQ) – net assets, 12/31 = 16,400 KQ.
b. Remeasurement of Subsidiary Trial BalanceDebits Credits
Cash 8,000 KQ x 1.62 $12,960Accounts Receivable 9,000 KQ x 1.62 14,580Equipment 3,000 KQ x 1.71 5,130Accumulated Depreciation 600 KQ x 1.71 $ 1,026Land 5,000 KQ x 1.59 7,950Accounts Payable 3,000 KQ x 1.62 4,860Notes Payable 5,000 KQ x 1.62 8,100Common Stock 10,000 KQ x 1.71 17,100Dividends Paid 4,000 KQ x 1.66 6,640Sales 25,000 KQ x 1.64 41,000Salary Expense 5,000 KQ x 1.64 8,200Depreciation Expense 600 KQ x 1.71 1,026Miscellaneous Expense 9,000 KQ x 1.64 14,760
$71,246
Remeasurement loss (debit) 840$72,086 $72,086
Calculation of Remeasurement LossNet monetary assets, 1/1 -0- -0-Increase in net monetary assets:
Common stock issued 10,000 KQ x 1.71 $17,100Sales 25,000 KQ x 1.64 41,000
Decrease in net monetary assets:Acquired equipment (3,000) KQ x 1.71 (5,130)Acquired land (5,000) KQ x 1.59 (7,950)Dividends paid (4,000) KQ x 1.66 (6,640)Salary expense (5,000) KQ x 1.64 (8,200)
Miscellaneous expense (9,000) KQ x 1.64 (14,760)Net monetary assets, 12/31 9,000* KQ $15,420Net monetary assets, 12/31
at current exchange rate 9,000 KQ x 1.62 14,580Remeasurement loss (debit) $ 840
* This amount can be verified as ending monetary assets (Cash + Accountsreceivable) minus ending monetary liabilities (Accounts payable + Notespayable): 17,000 KQ – 8,000 KQ = 9,000 KQ.
32. (30 minutes) (Translate the financial statements of a foreign subsidiary)
LIVINGSTON COMPANYIncome Statement
For Year Ending December 31, 2009
Goghs U.S. Dollars Sales 270,000 x 1/.63 = 428,571Cost of Goods Sold (155,000) x 1/.63 = (246,032)Gross Profit 115,000 182,539Operating Expenses (54,000) x 1/.63 = (85,714)Gain on Sale of Equipment 10,000 x 1/.58 = 17,241Net Income 71,000 114,066
Statement of Retained EarningsFor Year Ending December 31, 2009
Goghs U.S. Dollars Retained Earnings, 1/1/09 216,000 given 395,000Net Income 71,000 above 114,066Dividends Paid (26,000) x 1/.62 = (41,935)Retained Earnings, 12/31/09 261,000 467,131
Balance SheetDecember 31, 2009
Goghs U.S. Dollars Cash 44,000 x 1/.65 = 67,692Receivables 116,000 x 1/.65 = 178,462
Inventory 58,000 x 1/.65 = 89,231Fixed Assets (net) 339,000 x 1/.65 = 521,538Total 557,000 856,923
Liabilities 176,000 x 1/.65 = 270,769Common Stock 120,000 x 1/.48 = 250,000Retained Earnings 261,000 above 467,131Translation Adjustment (130,977)Total 557,000 856,923
Translation Adjustment Goghs U.S. Dollars Net assets, 1/1/09 336,000 x 1/.60 = 560,000
Net income, 2009 71,000 above 114,066Dividends paid (26,000) above (41,935)Net assets, 12/31/09 381,000 632,131Net assets at current exchange rate,
33. (35 minutes) (Compute translation adjustment and remeasurement gain or loss)
a. Remeasurement Gain or Loss
Net monetary assets, 1/1/09* 2,000 KR x 2.50 = $ 5,000
Increases in net monetary assets:Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000Sold Building** (7/1/09) 22,000 KR x 2.80 = 61,600Sales (2009) 80,000 KR x 2.70 = 216,000
Decreases in net monetary assets:Purchased Equipment (4/1/09) (30,000) KR x 2.60 = (78,000)Paid Dividends (10/1/09) (32,000) KR x 2.90 = (92,800)Rent Expense (2009) (14,000) KR x 2.70 = (37,800)Salary Expense (2009) (20,000) KR x 2.70 = (54,000)Utilities Expense (2009) ( 5,000) KR x 2.70 = (13,500)
Net monetary assets, 12/31/09 13,000 KR $ 32,500Net monetary assets, 12/31/09 at
current exchange rate 13,000 KR x 3.00 = 39,000Remeasurement gain (credit) $ (6,500)
** To determine cash proceeds from the sale of the building, changes in theAccumulated Depreciation and Buildings accounts must be analyzed alongwith Depreciation Expense and Gain on Sale of Building. Depreciationexpense is KR 15,000; KR 5,000 is attributable to equipment (AccumulatedDepreciation—Equipment increases by KR 5,000), KR 10,000 is depreciationof buildings. Accumulated Depreciation—Buildings increases by only KR
5,000 during 2009, therefore, the accumulated depreciation related to thebuilding sold during 2009 is KR 5,000. The Buildings account is decreasedby KR 21,000, thus the book value of the building sold must have been KR16,000 (as given). The Gain on Sale of Building is KR 6,000; therefore, cashproceeds from the sale are KR 22,000.
Net assets, 1/1/09* 100,000 KR x 2.50 = $250,000Increases in net assets
Issued Common Stock (4/1/09) 10,000 KR x 2.60 = 26,000Gain on Sale of Building** (7/1/09) 6,000 KR x 2.80 = 16,800Sales (2009) 80,000 KR x 2.70 = 216,000
Decreases in net assetsPaid Dividends (10/1/09) (32,000) KR x 2.90 = (92,800)Depreciation Expense (2009) (15,000) KR x 2.70 = (40,500)Rent Expense (2009) (14,000) KR x 2.70 = (37,800)Salary Expense (2009) (20,000) KR x 2.70 = (54,000)Utilities Expense (2009) ( 5,000) KR x 2.70 = (13,500)
Net assets, 12/31/09 110,000 KR $270,200Net monetary assets, 12/31/09 at
current exchange rate 110,000 KR x 3.00 = 330,000
Translation adjustment (positive) $(59,800)
* Net assets: Common stock + Retained earnings** Selling a building at a gain of KR 6,000 increases net assets by that amount.
Although not required by Part b, the beginning translation adjustment as ofJanuary 1, 2009 can be computed by translating the January 1 accounts andassuming that the translation adjustment is the balancing figure:
Common Stock, 1/1/09 70,000 KR x 2.40 = $168,000Retained Earnings, 1/1/09 30,000 KR given 62,319Net assets, 1/1/09 100,000 KR $230,319Net assets, 1/1/09 at current
34. (90 minutes) (Remeasure non-functional currency accounts into foreignfunctional currency and then translate foreign functional currency financialstatements into U.S. dollars)
a. Remeasurement of Mexican Operations
Canadian Dollars Pesos Debit Credit
Accounts payable 49,000 x .35 C 17,150Accumulated depreciation 19,000 x .25 H 4,750Building and equipment 40,000 x .25 H 10,000Cash 59,000 x .35 C 20,650Depreciation expense 2,000 x .25 H 500Inventory (beginning
—income statement) 23,000 x .30 A (’08) 6,900Inventory (ending
—income statement) 28,000 x .34 A(’09) 9,520Inventory (ending—balance sheet) 28,000 x .34 A(’09) 9,520
Purchases 68,000 x .34 A(’09) 23,120Receivables 21,000 x .35 C 7,350Salary expense 9,000 x .34 A 3,060Sales 124,000 x .34 A 42,160Main office 30,000 given 7,530Remeasurement loss Schedule One 10
Total 81,110 81,110
CanadianSchedule One—Remeasurement Loss Pesos DollarsNet monetary liabilities, 1/1/09* (16,000) x .32 (5,120)Increases in net monetary assets
Sales 124,000 x .34 42,160Decreases in net monetary assetsPurchases (68,000) x .34 (23,120)Salary Expense ( 9,000) x .34 ( 3,060)
Net monetary assets, 12/31/09** 31,000 10,860Net monetary assets, 12/31/09 at
current exchange rate 31,000 x .35 10,850Remeasurement loss 10
* Net monetary liabilities, 1/1/09, can be determined by first determining thenet monetary assets at 12/31/09 and then backing out the changes inmonetary assets and liabilities during 2009—sales, purchases, and salary
b. The following C$ financial statements are produced by combining thefigures from the main operation with the remeasured figures from thebranch operation. The Branch Operation and Main Office accounts offseteach other. Cost of goods sold for the Mexican branch is determined by
combining beginning inventory, purchases, and ending inventory asremeasured in C$.
Income Statement c. Translation into U.S. dollars— For the Year Ended December 31, 2009 Current Rate Method
Sales C$ 354,160 x .67 A = $ 237,287.20Cost of goods sold (223,500) x .67 A = (149,745.00)Gross profit 130,660 87,542.20Depreciation expense (8,500) x .67 A = (5,695.00)Salary expense (29,060) x .67 A = (19,470.20)Utility expense (9,000) x .67 A = (6,030.00)Gain on sale of equipment 5,000 x .68 H = 3,400.00
Remeasurement loss (10) x .67 A = (6.70)Net income C$ 89,090 $ 59,740.30
Statement of Retained EarningsFor the Year Ended December 31, 2009
Retained earnings, 1/1/09 C$ 135,530 Given $ 70,421.00Net income (above) 89,090 Above 59,740.30Dividends paid ( 28,000) x .69 H = (19,320.00)Retained earnings, 12/31/09 C$ 196,620 $110,841.30
Cash C$ 46,650 x .65 C = $ 30,322.50Receivables 75,350 x .65 C = 48,977.50Inventory 107,520 x .65 C = 69,888.00Buildings and equipment 177,000 x .65 C = 115,050.00Accumulated depreciation (31,750) x .65 C = (20,637.50)
Total C$ 374,770 $243,600.50
Accounts payable C$ 52,150 x .65 C = $ 33,897.50Notes payable 76,000 x .65 C = 49,400.00Common stock 50,000 x .45 H = 22,500.00Retained earnings 196,620 Above 110,841.30Cumulative translation adjustment Schedule Two 26,961.70
Total C$ 374,770 $ 243,600.50
Schedule Two—Translation Adjustment Net assets, 1/1/09 C$ 185,530 x .70 = $129,871.00Changes in net assets
Net income 89,090 Above 59,740.30Dividends (28,000) x .69 = (19,320.00)
Net assets, 12/31/09 C$ 246,620 $170,291.30Net assets, 12/31/09 at
current exchange rate C$ 246,620 x .65 = 160,303.00Translation adjustment, 2009 (negative) $ 9,988.30Cumulative translation adjustment, 1/1/09 (positive) (36,950.00)
Entry *CInvestment in Simbel ................................................... 38,244
Retained earnings, 1/1/09 ....................................... 38,244To accrue the 2008 increase in subsidiary book value (see Schedule 1). Entry isneeded because parent is using the cost method.
To eliminate subsidiary's stockholders' equity accounts and allocate the excessof fair value over book value to land (fixed assets).
The excess of fair value over book value is calculated as follows:Consideration paid (equal to fair value) ........... $126,000 £E420,000 x $0.30 Book value, 1/1/08 ..............................................
Common stock ................................................. (72,000) (£E240,000 x $0.30) Add’l paid-in capital ......................................... (45,000) (£E150,000 x $0.30)
Excess of fair value over book value ............... $ 9,000 £E 30,000 x $0.30
The excess of fair value over book value is 30,000 pounds. The U.S. dollarequivalent at 1/1/08, the date of acquisition, is $9,000 (£E30,000 x $.30).
Entry I
Dividend income ................................................ 13,750Dividends paid ............................................... 13,750
To eliminate intercompany dividend payments recorded by parent as income.
Fixed assets (revaluation) ........................... 900To revalue (write-down) the excess of fair value over book value for the changein exchange rate since the date of acquisition with the counterpart recognizedin the consolidated cumulative translation adjustment.
The revaluation of "excess" is calculated as follows:
Excess of fair value over book value
U.S. dollar equivalent at 12/31/09 £E30,000 x $.27 = $8,100U.S. dollar equivalent at 1/1/08 £E30,000 x $.30 = 9,000Cumulative translation adjustment
Net monetary assets, 1/1/09 13,000,000 0.040 520,000
Increase in monetary assets:Sales 25,000,000 0.035 875,000
Decrease in monetary assets:Purchase of inventory (14,500,000) 0.035 (507,500)Research and development (1,200,000) 0.035 (42,000)Other expenses (1,000,000) 0.035 (35,000)Dividends paid, 12/15/09 (1,500,000) 0.031 (46,500)Purchase of equipment, 1/3/09 (5,000,000) 0.036 (180,000)Purchase of buildings, 3/5/09 (12,000,000) 0.034 (408,000)
Net monetary assets, 12/31/09 2,800,000 176,000Net monetary assets, 12/31/09
at current exchange rate 2,800,000 0.030 84,000Remeasurement loss—2009 92,000
Part II. Explanation of the negative translation adjustment in Part I (a),remeasurement gain in Part I (b), and remeasurement loss in Part I (c).
The negative translation adjustment in Part I (a) arises because of two factors:(1) there is a net asset balance sheet exposure and (2) the Czech koruna hasdepreciated against the U.S. dollar during 2009 (from $.040 at 1/1/09 to $.030 at12/31/09). A net asset balance sheet exposure exists because all assets aretranslated at the current exchange rate and exceed total liabilities which are alsotranslated at the current exchange rate.
The remeasurement gain in Part I (b) arises because of two factors: (1) there is anet monetary liability balance sheet exposure and (2) the Czech koruna hasdepreciated against the U.S. dollar. Under the temporal method, Cash andAccounts Receivable are the only assets translated at the current exchange rate(total KCS 5,300,000). Accounts Payable and Long-term Debt are also translatedat the current exchange rate (total KCS 52,500,000). Because the Czech korunaamount of liabilities translated at the current rate exceeds the Czech korunaamount of assets translated at the current rate, a net monetary liability balancesheet exposure exists.
The remeasurement loss in Part I (c) arises because of two factors: (1) there is a
net monetary asset balance sheet exposure and (2) the Czech koruna hasdepreciated against the U.S. dollar during 2009. Cash and Accounts Receivableare the only assets translated at the current exchange rate (total KCS 5,300,000).Because there is no Long-term Debt in part 1(c), Accounts Payable is the onlyliability translated at the current exchange rate (total KCS 2,500,000). Becausethe Czech koruna amount of assets translated at the current rate exceeds theCzech koruna amount of liabilities translated at the current rate, a net monetaryasset balance sheet exposure exists.
Research Case 1—Foreign Currency Translation and Hedging Activities
The responses to this assignment will depend upon the company selected bythe student for analysis. It is unlikely that the company selected will disclose
the amount of any remeasurement gains and losses. The amount of translationadjustment reported in other comprehensive income usually can be found in astatement of stockholders’ equity. A positive translation adjustment indicatesthat the foreign currency in which the company operates, on average, increasedin dollar value during the year. A negative translation adjustment indicates theopposite.
Research Case 2—Foreign Currency Translation Disclosures in the ComputerIndustry
a. In 2005, IBM provided information in the annual report related to foreigncurrency translation and hedging activities in the following locations:i. Management Discussion.ii. Note A. Significant Accounting Policies, under Translation of Non-U.S
Currency Amounts.iii. Note L. Derivatives and Hedging Transactions.
In its Form 10-K for the year ended January 28, 2006, Dell providedinformation related to foreign currency translation and hedging activities inthe following locations:i. Item 1A. Risk Factors.ii. Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations, under Market Risk.iii. Note 1. Description of Business and Summary of Significant Accounting
Policies.iv. Note 2. Financial Instruments.
b. IBM’s foreign operations do not have a predominant functional currency.The company indicates that it operates in multiple functional currencies.The majority of Dell’s foreign operations have the U.S. dollar as theirfunctional currency. Most of IBM’s foreign operations probably have theforeign currency as functional currency and therefore are translated intodollars using the current rate method with translation adjustments reflected
in stockholders’ equity. Dell’s foreign operations, on the other hand, areremeasured into dollars using the temporal method with remeasurementgains and losses reflected in net income. These differences in translationmethod and disposition of the translation adjustment reduces thecomparability of information provided by the two companies.
c. From the Statement of Stockholders’ Equity, it can be seen that IBM reportedtranslation adjustments as follows over the period 2003-2005:2003 positive $1,768 million
2004 positive $1,055 million2005 negative $1,153 millionThe positive signs of the translation adjustments in 2003 and 2004 indicatethat, on average, the foreign currency functional currencies of IBM’s foreign
operations increased in value against the U.S. dollar in those years. Thenegative sign of the translation adjustment in 2005 indicates that, onaverage, the foreign currency functional currencies of IBM’s foreignoperations decreased in value against the U.S. dollar in that year.
Dell reported translation adjustments in other comprehensive income asfollows:Fiscal 2003 negative $35 millionFiscal 2004 positive $1 millionFiscal 2005 negative $8 millionOn average, the foreign currency functional currencies of Dell’s foreign
operations decreased in value against the U.S. dollar in 2003 and 2005, andincreased in value in 2004.
The magnitude of the translation adjustments reported in stockholders’equity is much larger for IBM than for Dell. This undoubtedly occursbecause Dell has a much smaller balance sheet exposure related to foreigncurrency functional currency operations. For Dell, the magnitude of theremeasurement gain/loss reported in net income is probably larger (unlesshedged away) than the translation adjustment in stockholders’ equity. Dellindicates that remeasurement gains/losses are reported in Investment andOther Income, Net on the income statement but does not disclose the
amount.
d. In Note L. Derivatives and Hedging Transactions, IBM indicates that asignificant portion of the company’s foreign currency denominated debt isdesignated as a hedge of its foreign currency balance sheet exposures. Thecompany also uses currency swaps and forward contracts to hedge its netinvestments in foreign operations.Although Dell hedges foreign currency transactions, firm commitments, andforecasted transactions, the company makes no mention of hedging itsbalance sheet exposures.
e. The response to this requirement will vary from student to student. Much ofthe information provided in requirements a. – d. above can be included in aformal report to satisfy this requirement.
a. Using the advanced query function in the FARS database to search for thephrase “different functional currencies” returns two hits: FAS 52, paragraphs7 and 43. Paragraph 43 is part of Appendix A: Determination of the FunctionalCurrency.
b. FAS 52, paragraph 7 indicates that if an entity has more than one distinct andseparable operation, each operation may be considered a separate entity. Ifthose operations are conducted in different economic environments, theymight have different functional currencies.
FARS Case 2—Change in Functional Currency
a. Using the advanced query function in the FARS database to search for thephrase “functional currency has changed” returns two hits: FAS 52,paragraphs 9 and 45. Paragraph 45 is part of Appendix A: Determination ofthe Functional Currency. A search for the phrase “change in the functional
currency” returns one hit: FAS 52, paragraph 9.
b. FAS 52, paragraph 9 indicates that once the functional currency for a foreignentity is determined, that determination shall be used consistently. A changein functional currency is appropriate if significant changes in economic factsand circumstances indicate clearly that the functional currency has changed.There is no restatement of previously issued financial statements for changesin the functional currency.
a. The Brazilian operations are equity method investments, which means thatBellSouth must report investment income (loss) for its percentage ownership
interest in the U.S. dollar translated income (loss) of the operations. Thecompany states that its Brazilian operations had net U.S. dollar denominatedliabilities. The U.S. dollar liabilities were revalued upward by the Brazilianoperations with offsetting foreign exchange losses reported in Brazilian real (BRL) income.
The foreign exchange loss on U.S. dollar liabilities might have been largeenough to cause negative net income (a net loss) in BRL terms, which whentranslated at the average exchange rate for the quarter (under the current ratemethod) resulted in a U.S. dollar loss being reported by BellSouth.
Alternatively, the temporal method of translation was used, the Brazilianoperations had net BRL asset exposures, and the devaluation caused a largeenough remeasurement loss that a net U.S. dollar loss resulted. Given thatliabilities were denominated in U.S. dollars, it is likely that BRL assets exceedBRL liabilities generating a net BRL asset exposure.
b. The company appears to be saying that the exchange loss is not yet realized.If, subsequent to the January 1999 devaluation, the Brazilian real appreciatesagainst the U.S. dollar, the unrealized loss will become smaller. On the otherhand, the loss will become even larger if the real continues to depreciate.
c. The objective of reporting normalized net income is to remove from netincome the effect of one-time only events that do not qualify under U.S. GAAPas extraordinary items or discontinued operations, and therefore are notreported separately in the income statement. The company appears to besignaling its belief that the foreign currency loss is a nonrecurring(extraordinary) item.
d. This assessment is valid if one compares normalized diluted EPS in the firstquarter of 1999, which excluded a large loss, with normalized diluted EPS inthe first quarter of 1998, which excluded a large gain. Whether financialanalysts would use normalized EPS rather than reported EPS in making
decisions about BellSouth is an empirical question.
Net assets, 12/31/09 3,900 1,915Net assets, 12/31/09
at current exchange rate 3,900 $0.38 1,482
Translation adjustment (negative) 433
c. With the FC as functional currency, the U.S. dollar net income reflected in theconsolidated income statement is $315. If the U.S. dollar were the functionalcurrency, the amount would be twice as much—$630. The amount of total assetsreported on the consolidated balance sheet is 23.4% smaller than if the U.S.dollar were functional currency [($3,940 – $3,192)/$3,192].
The relations between the current ratio, the debt to equity ratio, and profit margincalculated from the FC financial statements and from the translated U.S. dollarfinancial statements are shown below.
These results show that the temporal method distorts all ratios as calculatedfrom the original foreign currency financial statements. The current ratemethod maintains all ratios that use numbers in the numerator anddenominator from the balance sheet only (current ratio, debt-to-equity ratio) orthe income statement only (profit margin). For ratios that combine numbersfrom the income statement and balance sheet (return on equity, inventoryturnover), even the current rate method creates distortions.
The U.S. dollar amounts reported under the temporal method for inventory andfixed assets reflect the equivalent U.S. dollar cost of those assets as if theparent had sent dollars to the subsidiary to purchase the assets. For example,to purchase FC 6,000 worth of fixed assets when the exchange rate was$.50/FC, the parent would have had to provide the subsidiary with $3,000.
The U.S. dollar amounts reported under the current rate method for inventoryand fixed assets reflect neither the equivalent U.S. dollar cost of those assets
nor their U.S. dollar current value. By multiplying the FC historical cost by thecurrent exchange rate, these assets are reported at what they would have costin U.S. dollars if the current exchange rate had been in effect when they werepurchased. This is a hypothetical number with little, if any, meaning.
Excel and Analysis Case—Parker Inc. and Suffolk PLC
This assignment requires translation of foreign currency financial statementsunder three different sets of assumptions regarding changes in the U.S. dollarvalue of the British pound. Under the first set of assumptions, the British
pound appreciates steadily from $1.60 at 1/1/08 to $1.68 at 12/31/09. Under thesecond set of assumptions, the exchange rate remains $1.60 from 1/1/08 to12/31/09. Under the third set of assumptions, the British pound depreciatessteadily from $1.60 at 1/1/08 to $1.52 at 12/31/09.
Part I—Appreciating Foreign Currency
Relevant exchange rates: January 1, 2008 $1.602008 Average $1.62December 31, 2008 $1.64January 30, 2009 $1.65
Net assets, 12/31/09 £ 54,250,000Cumulative TranslationAdjustment, 12/31/09(positive) $4,147,500
ExchangeConsideration Paid Allocation Schedule Pounds Rate DollarsConsideration paid (equal to fair value) £52,000,000 $1.60 $83,200,000Book value 50,000,000 $1.60 80,000,000Excess of fair value over book value £ 2,000,000 $ 3,200,000
Translation Adjustment Related to ExchangeExcess of Fair Value Over Book Value Pounds Rate DollarsExcess of fair value over book value £2,000,000U.S. dollar value at 12/31/09 $1.68 $3,360,000U.S. dollar value at 1/1/08 $1.60 3,200,000
Consideration Paid Allocation Schedule Pounds Rate DollarsConsideration paid (equals fair value) £52,000,000 $1.60 $83,200,000Book value 50,000,000 $1.60 80,000,000Excess of fair value over book value £ 2,000,000 $ 3,200,000
Translation Adjustment Related to ExchangeExcess of Fair Value Over Book Value Pounds Rate DollarsExcess of fair value over book value £2,000,000U.S. dollar value at 12/31/09 $1.60 $3,200,000U.S. dollar value at 1/1/08 $1.60 3,200,000Translation adjustment related to excess, 12/31/09 $0
Net assets, 12/31/09 £ 54,250,000Cumulative TranslationAdjustment, 12/31/09 (negative) $(4,147,500)
ExchangeConsideration Paid Allocation Schedule Pounds Rate DollarsConsideration paid (equal to fair value) £52,000,000 $1.60 $83,200,000Book value 50,000,000 $1.60 80,000,000Excess of fair value over book value £ 2,000,000 $ 3,200,000
Translation Adjustment Related to ExchangeExcess of Fair Value Over Book Value Pounds Rate DollarsExcess of cost over book value £2,000,000U.S. dollar value at 12/31/09 $1.52 $3,040,000U.S. dollar value at 1/1/08 $1.60 3,200,000
