For anyone who has done question 11 in CFAI Sample 2, can you please explain why we couldn’t have translated Kerwin’s Equity using current exchange rate like the way it is done in the books? Question 11 If the Swedish krona is chosen as kerwin’s functional currency, Kerwin’s 2008 return on equity ratio after translation will be closest to xxx. Answer: Translate Equity using historical rate on the date the company was acquired by parent. I thought that if asset and liability were translated using current rate under all current method, it only makes sense to have Equity translated at current rate too. Also I don’t remember reading about any exceptions that state if the subsidiary is acquired on certain date, its asset, liability or equity need to be translated at non current rates. Can someone please confirm?
Can someone please help shed some light on this? Thanks
seems to be an error. I have asked for clarification from CFAI - have not heard back from them. Using the Current rate --> should be 22.5% for ROE.
agree with CP… you can back into RE Assets * current rate = 5551 Liab * curent rate = 2196 Equity must be the difference, 3355… So at average rate, the NI is 755… 755/3355 = 22.5% roe… Although I do have equity under current method other than RE = historic rate… I dont know where i got that tho…
under current rate, common + preferred equity and div’s are translated at historical - same treatment as temporal - so rates when equity issued, when div’s paid etc. RE is then determined based on net income. you translate net income at avg rate, figure out what retained earnings must be based on REend = REbeg + NI - Div’s. Then your CTA is whatever is necessary to balance A-L = E. As an aside, usually they say RE beg = 0 by saying that the sub began operations that year, otherwise, they would need to give you translated RE beg.