can some one please tell me what we mean by foreign currency under multinational operations… it says when foreign currency is appreciating , mixed ratio will be lower… my question is what they mean by foreign currency? is it the presentation currency or the local currency???.. and can some one please explain why the answer is B for the below example… thanks… The U.S. dollar has been appreciating relative to the local currency over the past year. The use of the temporal method to translate a foreign subsidiary’s financial statements to U.S. dollars will most likely have which of the following effects on the fixed-asset turnover ratio (S/FA) relative to what the ratio would have been without the effects of translation assuming no new fixed assets were purchased throughout the year? A) There will be no effect on the ratio. B) The ratio will fall. C) The ratio will rise. Your answer: C was incorrect. The correct answer was B) The ratio will fall. The basis for using the all current method is when Functional Currency is NOT the same as Parent’s Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent’s Presentation Currency. Since the dollar is appreciating the local currency is depreciating thus each foreign currency unit is buying more dollars in the past relative to the present. Fixed assets are remeasured at the historical rate and sales are remeasured at the average rate under the temporal method. Since the historical rate is buying more dollars relative to the average rate, the denominator is staying the same whereas the numerator is getting smaller thus the ratio is falling.
It doesn’t matter for this question. They give you temporal, that’s it. All they’re asking you to figure out is A) how the temporal method is applied, B) how appreciating/depreciating foreign currencies affect remeasurement.
Ok… but what is the foreign currency here? Dollar or the local currency? because the answer ‘ratio will fall’ will be true when the foreign currency is appreciating… and here the dollar is appreciating… so is dollar foreign currency here?
Foreign Currency is local currency. I do not mean to confuse the issue but you need to understand what the functional currency is… 1. Answer the question- what is the functional currency 2. Is the functional currency same as the preparing currency (Local currency), If yes, no temporal method, if No- Temporal Method. 3. Is Functional Currency the same as reporting currency. If yes, no current method, if No Current Method. Hope this helps.
Sales and the fixed assets you are seeing are those of the foreign company, so you are looking at result of operation from a foreign company. If the dollar was getting stronger, then when you ask those guys overseas to send you the money (or when you want to look at the S/FA ratio) those numbers will be translated to dollars. The short-cut way to find the answer is to look at the numerator and ask what rate will be applied to it. Here it is weighted average which means your sales in dollars are worth less than you would like them because they will buy less dollars at the current high rate. Look at the denominator, where you have your fixed assets translated using historical rate (the good rate before the dollar got stronger). Those assets are worth more than if you valued them at today’s rate, fixed assets are relatively higher (I don’t know why the answer says they stay the same), so the ratio is lower.
temporal - fixed assets - historic… that’s why it stays the same!
yes, I see, although I don’t really know how in reality they decide what the historic rate is! Current and average are ok, but historic is a problem…how many years to go back? If it’s based on date of acquisition, then do you have to keep track of what rate was used to purchase every asset, etc.? Good stuff.
For Assets: historic is when it was purchased