Hi Guys,
The curriculum says “If you have a net asset exposure” (usually in the case of Current Rate Method) and foreign currency appreciates we will have a positive impact.
My Question is if the Parent company is in US (Presentation currency USD) and subsidiary is in Italy (functional currency EURO), then who will have a net asset exposure : 1) The Parent or 2) The subsidiary?
Secondly, which currency will be considered foreign currency in this case?
TIA
The net exposure is for parent of course. The parent will consolidate its subsidiary in its Consolidated Financial Statements.
The foreign currency is the euro.
The point of view is the parent.
Exactly, that was my understanding until i read an example in CFA curriculum.
Question: Assume that Interco is a Europe-based company that has the euro as its presentation currency. On 1 January 20X1, Interco establishes a wholly owned subsidiary in Canada, Canadaco.
The given Exchange rate were : Euro per C$ 0.7 (initially), Euro per C$ 0.8 (Later)
In that example it is saying "The positive translation adjustment under the current rate method can be explained by the facts that Canadaco (subsidiary) has a net asset balance sheet exposure (total assets exceed total liabilities) during 20X1 and the Canadian dollar strengthened against the euro.
This is not reconciling with the explanation u just gave.
Harrogath answered correctly. Net BS exposure in translation process is considered by the point of Parent.
Your example just says that sub has no significant debt exposure. Thus parent has positive NAV exposure against CAD.
In the real world you may have Top Parent - Mid Parent - Sub 1 which holds Sub 2. Each in its own currency exposure. Consolidation is usually done at the level of Top Parent.
I think they are just saying once the parent consolidates the sub, the sub on the parents statements will have have a net asset exposure.
Still not clear, as per my understanding the book should have said “that Intereco (Parent) has a net asset balance sheet exposure” rather than the subsidiary.
Bottom line. You understand how to use the Current Rate method and understand exposure in appreciating vs depr foreign currency. The test will be clear on what it is asking you, or the question will be thrown out. Focus on that