Flow Effect and holding effect for current translation, just saw it on a practice exam never seen it before or read it in the notes. Practice Exam 3 AM book 7, what are your thoughts
Also realised and unrealised g/l Under current and temporal for mon and nonmonatary assets owned by sub. What’s recognised under what method?
Exam 3am Problem 26 Analysis of Multinational Operations is discussed in more detail in the problem than appears in our Notes or in the CFA Institute source curriculum. Distinguishing between holding effect and flow effect is not necessary for this problem. Although the answer is correct, candidates may find the extra details confusing. Please see the attached file for a more basic explanation of the solution. http://www.schweser.com/downloads/update_uploads/update_file_1992_L2_Exam3_Q26%20(2).doc
Very thorough answer! Thanks a lot… Can someone answer my other question?
temporal g/l hits i/s based on the net monetary asset exposure - ie net monetary asset exposure combined w/ appreciating currency = gain to i/s current g/l hits equity as a plug figure where net asset exposure is the determinant - ie net asset exposure combined w/ depreciating currency = loss to equity
Hey, my understanding of all current is translate IS at average then take RE_closing = RE_opening + NI - Divs (all in parent currency) and use RE_closing to balance balance sheet and find CTA. However you are usually given RE_Opening in parent Currency. So WHY do you take the begining equity figure of 154 and why do you take the two years NI of 25 and 12? And then just add it all together.
djshft - what about the realised/unrealised g/l on asset? What hits the I/S or B/S?
mambo Current Rate method: A is at CR, L is at CR. So A-L = E --> on a total basis will be at the CR as well. This figure would include the impact of the CTA adjustment in complete as well.
always look at the Net asset position. Is it Current Rate method? Yes Do we have a Net Asset position ? Yes Did LC Appreciate? Yes --> You have a Gain reported in CTA Did LC Depreciate? Yes --> You have a LOSS reported in CTA Do we have a Net Asset position ? NO Did LC Appreciate? Yes --> You have a LOSS reported in CTA Did LC Depreciate? Yes --> You have a GAIN reported in CTA Is it Current Rate method? NO Do we have a Net MONETARY Asset position ? Yes Did LC Appreciate? Yes --> You have a Gain reported in IS Did LC Depreciate? Yes --> You have a LOSS reported in IS Do we have a Net MONETARY Asset position ? NO Did LC Appreciate? Yes --> You have a LOSS reported in IS Did LC Depreciate? Yes --> You have a GAIN reported in IS
mambovipi Wrote: ------------------------------------------------------- > Hey, my understanding of all current is translate > IS at average then take > RE_closing = RE_opening + NI - Divs (all in parent > currency) > and use RE_closing to balance balance sheet and > find CTA. However you are usually given RE_Opening > in parent Currency. > > So WHY do you take the begining equity figure of > 154 and why do you take the two years NI of 25 and > 12? And then just add it all together. Thanks CPK, can anyone help me out with the above?
What is considered NMA? Cash + Receivables - Payables - Debt Obligations?
Non Monetary is all the rest. Inventory + PP&E (On assets) The above you have listed are all monetary.
mambo, you are not simply adding them together. each of them is being converted at its own corresponding Historic rate. I had solved it a little differently as follows: 2006: E=154 --> Convert at CR=1.2 = 128.33 CS 2006=50/1.2=41.67 So RE 2006=128.33-41.67=86.66 2007: E=179/1.4 = 127.86 CS2007=50/1.2=41.67 NI2007=25/1.3=19.23 RE2007=RE2006+NI2007=86.66+19.23=105.89 RE2007+CS2007+CTA=E2007 So CTA2007=127.86-(41.67+105.89)=-19.7 2008: E=191/1.5=127.33 CS2008: 50/1.2=41.67 NI2008=12/1.45=8.28 RE2008=RE2007+NI2008=105.89+8.28=114.17 RE2008+CS2008+CTA2008=E2008 So CTA2008=127.33-(41.67+114.17)=-28.51
CPK - I meant Net Monetary Assets by NMA; Below is the Schweser Answer. Very straight forward. They start with the original untranslated equity * which is 154 at the end of 2006 beginning 2007 translated at the original rate at the time of investment of 1.20, then the earnings for 2007 and 2008 are added up, each translated at the historical AVERAGE exchange rate and accumulated. The difference between your asset base and your liability/equity base will be your CTA for that year. 2008 AUD$ Exchange Rate USD Total Assets 935.0 1/1.50 623.3 Total Liabilities 744.0 1/1.50 496.0 Beginning Equity* 154.0 1/1.20 128.3 2007 Earnings** 25.0 1/1.30 19.2 2008 Earnings*** 12.0 1/1.45 8.3 Total Liabilities & Equity 935.0 651.8 Translation Adjustment (CTA Balance) -28.5
misunderstood… sorry Since the A and L are translated at the Current Rate in the Current Rate method - Equity as a whole would be translated at the Current Rate as well. (This Equity as a whole in the Current Rate Method = Retained Earnings + Common Stock (Historic) + CTA for the period.) Using the above - I am getting the Plug #s.
CP, Yes, I meant for the temporal. Love your little decision matrix; I think it explains it very succinctly and it all makes a lot of sense if you just step back for a minute. At the current rate if you have positive equity, that equity will go up in value if the currency of the subsidiary appreciates. Opposite for depreciation. For the temporal method, if you have a cash negative position, meaning that you owe more than you have in current liquidity then as the currency depreciates then your liability has actually become smaller and thus a gain. The opposite for appreciation. Sometimes I wish Schweser or Stalla would explain things a lot more clearly. Most of this material (Level II) is pretty basic and if one understands the concepts, the math becomes secondary. I sometimes wish they focused more on this than teaching financial math and then letting people figure out the concept for the math.
No. Equity is translated at the rate in effect on the date of issuance (historical). A+L are translated as current, while all income statement items are translated at the average exchange rate.
Step back El Matarife. I am saying that the Entire Equity (inclusive of CTA) is at an Current rate. And that is correct. A is at Current Rate L is at Current Rate So E = A - L is at CURRENT RATE. E = CS + RE + CTA Now you have changes happening which gets finally reflected as a CTA adjustment.
Respect.
CPK, sebrock, thanks for youur help