Accounting for foreign inventories and FX

Hi all, I couldn’t find this online so I thought I’d access the brain trust on this board. Does anyone know the financial statement impact of exchange rate fluctuations when a company has inventories held in a foreign subsidiary? I guess the question has 2 parts: 1) If Kraft has a can of mac and cheese held in the warehouse of its UK subsidiary and it’s currently on its books for 1 British pound at 2010 year end, would we use the pound/USD exchange rate at the end of the year to determine the dollar value of that can for Kraft’s US SEC filings? 2) What happens if the USD appreciates in 2011 and all else remains equal? Does the difference in value (in USD) flow through OCI and never hit the income statement? 3) Would this treatment differ if we were talking about a factory or equipment, instead of inventories?

  1. Yes, assuming the UK sub uses the GBP as it’s functional currency, and the consolidated statements report in USD, then the GBP-denominated inventory balances would be translated to USD (using the rate in effect on the balance sheet date). 2. Not positive, but I think the revaluation gains/losses would hit the P&L each period (as an fx gain/loss reported outside of operating income). 3. Yes. If the UK sub holds capital assets, they would be capitalized using the historical rate when the asset was purchased, in effect “locking in” its USD-equivalent value.