Hi,
I’m currently working on a valuation model for a public Chinese company that mainly operates in China and is also listed as an ADR in the U.S. What would be the proper treatment when translating the financial statements from RMD to USD? And are there special considerations in applying exchange rates in the forecast going forward?
Any feedback is greatly appreciated!
Hi,
for translating of the income statement use the average foreign exchange rate (FX-rate) for the period, e.g. (BoP FX-rate + EoP FX-rate)/2. For the balance sheet use the corresponding year-end FX-rate for the period for all balance sheet items except equity. Recognize then any translation gains and losses on the balance sheet directly equity, bypassing the net income.
For the short-and mid-term forecast I would look at FX future markets and studies from banks, to get an approximation on what the market expects. If your forecast model is over a longer time-period I would then just fix the rate on a certain level, for instance after year 5.
Regards, Oscar
Thank you for your insight!
Would it not be easier to value the Chinese company in Yuan and once you have a per-share price just convert it to USD?
Probably yes.
There’s a really good thread on this that’s been created already.
I missed this earlier but the statement uses an average exchange rate to convert RMD to USD. I’m confused as to why the company would state that the functional currency is USD (presentation currency is RMD). Based on operations/sales, I thought the functional currency would be RMD…but maybe it’s due to the stock ADR listing in the US?