Financial Education

Consider a business that starts a foreign subsidiary on July 30 with the following assets, liabilities and equity:

At the time the foreign subsidiary is established, the exchange rate is one foreign unit per dollar. Unfortunately, the company has poor timing and overnight the exchange rate plummets such that the foreign currency is only worth $0.50. If the company consolidates its foreign subsidiary’s results using the translation (or all-current) method, the results will be adjusted as follows:

The value of the subsidiary’s assets, in terms of the parent currency, have declined by $12,000. Partially offsetting this, the value of the subsidiary’s liabilities has also decreased, by $8,000. The $4,000 difference is the net decline in the subsidiary’s value, which will be reported as a negative cumulative translation adjustment within the equity portion of the balance sheet.

Since the major balance sheet accounts are all adjusted by the same amount, balance sheet ratios such as the current ratio and debt/equity ratio will be unaffected by the change in exchange rates.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis

See also:

Translating Foreign Subsidiary Balance Sheet - Illustrating the Temporal Method

Translating the Financial Statements of a Foreign Subsidiary in a Hyperinflationary Economy

Translating a Foreign Subsidiary Income Statement Using the All-Current Method

Translating A Foreign Subsidiary’s Results into the Parent Company’s Currency

Translation Gains and Losses