Multinational Operations – Mixed Ratios

CFA Level II
#1

Hi I’m hoping that somebody could clear this up for me.

I understand that pure ratios are unaffected by application of the current rate method.

A source of confusion for me is when the local currency is appreciating/depreciating. In the Schweser notes they state that if the foreign currency is appreciating, the reporting currency statements will show a lesser ratio and vice versa (I’ve remembered this relationship as being inverse)

I came past a Schweser practise exam question where the local currency was appreciating.

“will total asset turnover (calculated using end-of period balance sheet figures) likely be larger when calculated from the Rho (local currency) financial statements or the financial statements translated into the reporting currency (US$)

Are there general rules for this for e.g?

Foreign currency appreciates

  • reporting ratios less
  • functional currency (local currency) greater

Or is this purely based on the scenario that is given in the item set?

#2

If you’re using the end of period figure, then yes, you’ll get a lower total asset turnover when foreign FX appreciates. Assuming this is current method.

Just know this:

Net Liability, foreign FX appreciated - loss to domestic (ie acct payble, you’ll have to FX at a higher rate and pay more in foreign ccy)

Net Asset, the opposite.

Assets abroad will appreciate when the foreign ccy appreciates, so when you translate it back, you’ll have a higher asset value.