Multinational Operations – Mixed Ratios

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?

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.