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A - Translate Balance Sheet Using Closing Rate Method: Forex Difference 198000

The document contains information about foreign exchange rates between the US dollar and British pound for 2012, as well as examples of translating a balance sheet and profit & loss statement using the closing rate method and temporal method. It then discusses the strengths and limitations of each method. The closing rate method records exchange differences as movements in reserves rather than including them in the income statement, and is used when the foreign enterprise operates primarily in its functional currency. The temporal method takes all exchange differences to the income statement, included within ordinary activities, and is used when the functional currency is that of the investing company. Both methods have strengths and limitations depending on whether foreign exchange is considered an ordinary part of business.

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105 views2 pages

A - Translate Balance Sheet Using Closing Rate Method: Forex Difference 198000

The document contains information about foreign exchange rates between the US dollar and British pound for 2012, as well as examples of translating a balance sheet and profit & loss statement using the closing rate method and temporal method. It then discusses the strengths and limitations of each method. The closing rate method records exchange differences as movements in reserves rather than including them in the income statement, and is used when the foreign enterprise operates primarily in its functional currency. The temporal method takes all exchange differences to the income statement, included within ordinary activities, and is used when the functional currency is that of the investing company. Both methods have strengths and limitations depending on whether foreign exchange is considered an ordinary part of business.

Uploaded by

babylovelylovely
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Forex

Date

D$ to
01-Jan-12
01-Apr-12
01-Sep-12
31-Dec-12
Average 2012

10
15
18
25
20

When ordinary shares issued and opening stock purchased


When fixed assets purchased
When closing stock for 2012 bought
When dividend paid

A - Translate Balance Sheet using closing rate method


Balance Sheet
D$
Translation rate
Fixed assets (NBV)
2800000
25
Stock
8000000
25
Other net current assets
2200000
25
Debentures
-6000000
25

Share Capital
Profit
Foreign exchange reserve

5000000
2000000
balancing figure
or calculation

10
20

A - Closing rate method


Exchange differences are recorded as movements in
reserves rather than included in the income statement

112000
320000
88000
-240000
280000
500000
100000
-320000
280000

B - Temporal method
All exchange differences are taken to the income
statement and included within ordinary activities

B - Translate Balance Sheet and Profit & Loss using the temporal method
Balance Sheet
D$
Translation rate
Fixed assets (NBV)
2800000
15
186667
Stock
8000000
18
444444
Other net current assets
2200000
25
88000
Debentures
-6000000
25
-240000
479111
Share Capital
Profit

5000000
10
2000000 balancing figure
or calculation

500000
-20889
479111

Profit & Loss Account


Turnover
Cost of sales
Opening stock
Purchases
Closing stock

D$

D$
12,000,000
7,200,000
7,000,000
-8,000,000

-200,000
-800,000

600000

10
20
18

720000
350000
-444444
-625556
-25556

20
15

-10000
-53333

20

198000
109111
-90000

-6,200,000
5,800,000

Gross profit or loss


General expenses
Depreciation

Translation rate
20

-1,000,000
Forex difference
Profit/loss before tax
Tax

4,800,000
-1,800,000

Profit/loss after tax


Dividends
Profit/loss for the year

3,000,000
-1,000,000
2,000,000 from B/S

25

19111
-40000
-20889

C - Strengths & limitations of closing rate and temporal method


Closing rate method
Used when the foreign enterprises are quasi-independent entities. The key determinant appears to be whether
or not the foreign enterprise operates primarily in the functional currency. If this is the case, the closing rate
method applies. This would be true for most foreign business operations (typically subsidiaries).
Temporal method
If the functional currency is that of the investing company rather than the foreign enterprise, the temporal method
should be used. Hence the temporal method is to be used where the trade of the foreign enterprise is more
dependent on the economic environment of the investing company's currency than that of its own reporting
currency. By using the method, the consolidated accounts reflect the transactions of the foreign enterprise as if
they had been carried out by the investing company itself.
Strengths and limitations then depend on whether forex is an ordinary part of business and therefore to be
included in the profit and loss calculations, or to be treated as reserves. This means that
judgement is involved on what is the functional currency, but the flexibility is also a strength to avoid volatility of
profits that may distort the picture of ordinary activities.

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