Question

What is a translation adjustment? How is it computed? Where should it be reported in a set of consolidated financial statements? How might it differ in different companies and in different industries? Provide examples.

Answer 1

Answer:-

Part 1)

It is an adjustment made in the consolidated financial statement by the parent company when the company have branch or have other businesses that prepares the financial statement in different currency calles translation adjustment.

Part 2)

Translation adjustment starts with translation of income statement prepared different currency than what parent have used. This is calculated using base as the functional currency. Say a parent company uses US dollars as the functional currency but the branch uses euro as the functional currency. In this case euros are converted into US dollars (the rate used is of the day when the transaction took place) and this gives raise to gains and losses due to different rates.

The next step is determining the translation method to be used for the balance sheet of the foreign operation. ASC Topic 830 allows two translation methods: the current rate method and the temporal method. The determination of the method rests on whether the foreign operation is in a country that is experiencing hyperinflation defined as a cumulative rate of inflation that is equal to or greater than 100% in three years. The foreign operation in this case is in a country that has not experienced hyperinflation; therefore, the current rate method is appropriate. The current method requires that all asset and liability accounts be translated at the current rate while stockholders’ equity accounts are translated at historical exchange rates. The difference is reflected through the cumulative translation adjustment.

The balance sheet is translated in two steps using the current exchange rate at the balance sheet date. Normally, operations conducting operations in multiple currencies would have cash, accounts receivable, and accounts payable recorded in each currency. These would need to be translated to the functional currency. In this case, there are both accounts receivable and accounts payable carried in foreign currencies (dollars and euros) that need to be converted using the appropriate rate at year end

Part 3)

With the translation process completion the main focus comes on consolidated financial statements. The income statement of branch and parent would be combined and adjustment will be made for the intercompany transactions. Same goes with the balance sheet, they are also combined and intercompany transactions are adjusted. These intercompany adjustments are then reported on the combined income statement and statement of the comprehensive income. The reporting of the cumulative currency translation adjustment would be reported as a line item in the stockholders’ equity section of the balance sheet.

Part 4)

These differs from company to company and industries to industries as in company to company some companies are large and some are small. The adjustment in larger company would be higher than that of the small company. Again it depends based on the foreign setup, multinational companies would have more complexities then company operating in one or two countries.