I saw this one at the back of Schweser FR&A book… Exposure under all current = Shareholder’s equity. Exposure under temporal = (cash + a/c receivable) - (a/c payable + current debt + long term debt) Flow Effect = change in exposure (in LC) * (ending rate - avg rate) holding gain/loss = begining exp (in LC) * (ending rate - beg rate). translation gain/loss $ = flow effect + holding effect. I know that this is not there in LOS…but does this formula work for all current / temporal both ? And we just put the end result either as CTA (all current - in balancesheet) / income statement for Temporal ? I was just thinking that if it works, this may save some time in exam…and I can devote that time to currency swap if it comes…
flow effect and holding effect is so last year’s LOSs. I would not recommend trying to drill those into your head (esp. since we are not aware of all the nuances) so close to the exam. Possibly folks who very narrowly missed passing last year, and know it thoroughly can use that method. However the First two lines: Exposure under all current = Shareholder’s equity. Exposure under temporal = (cash + a/c receivable) - (a/c payable + current debt + long term debt) are relevant. Current Rate: All assets and liabs are translated at the current rate. So everything is exposed to the currency rate fluctuation. So Net Assets are exposed to currency fluctuations. On Temporal method: Fixed Assets, Accumulated Depreciation and inventory (Non Monetary assets) are still recorded at Historic Cost. And typically on most balance sheets you will rarely find any non-monetary liabilities. So Net Monetary Assets - are exposed to currency fluctuations.
Thanks cp. It would be a risk without knowing nuances… It won’t work just by memorizing the formula.
Question on this…Does anyone know if we need to know how to calculate this or just know the B/S exposure under each method? I know the balance sheet exposures…but calculating this is another story…I’ve seen some examples where this is a “plug” figure after all the accounts have been translated…etc
cpk123 Wrote: ------------------------------------------------------- > flow effect and holding effect is so last year’s > LOSs. I would not recommend trying to drill those > into your head (esp. since we are not aware of all > the nuances) so close to the exam. Possibly folks > who very narrowly missed passing last year, and > know it thoroughly can use that method. > > However the First two lines: > Exposure under all current = Shareholder’s > equity. > Exposure under temporal = (cash + a/c receivable) > - (a/c payable + current debt + long term debt) > > are relevant. > > Current Rate: All assets and liabs are translated > at the current rate. So everything is exposed to > the currency rate fluctuation. So Net Assets are > exposed to currency fluctuations. > > On Temporal method: Fixed Assets, Accumulated > Depreciation and inventory (Non Monetary assets) > are still recorded at Historic Cost. And typically > on most balance sheets you will rarely find any > non-monetary liabilities. So Net Monetary Assets - > are exposed to currency fluctuations. Once again CPK to the rescue, the BSAS exam had a question which I got wrong and the answer was the holding effect, I thought I had missed that from schweser or cfai. however, there was no reference to it anywhere. Now, I know why there wasn’t / isn’t…we don’t need to know it. It isn’t hard or anything, but if you haven’t been exposed to it, you don’t know why you can’t get the correct answer.
I got both the questions wrong in BSAS for the same reason. I really didn’t knew where to start.
I have a question though. Is the exposure effect different from the CTA? My notes say that when calculating CTA under the Current method, Assets and Liabilities are translated at current rate, retained earnings at the average rate and capital contributions at the historic rate. Is this correct?
aarg, you have to kind of back into your Retained earnings, not use an average rate. You can translate everything other balance sheet item at the rates you have, then you will have to plug retained earnings for your balance sheet to balance. CTA happens to your Income statement I believe. That is another plug you need to find by completing the rest of your income statement then finding the value for CTA.
cta is on balance sheet.
damn… i have always tried to plug my way to both retained earnings and cta. should you use average rate for retained earnings as aarg suggests?
CFAdreams Wrote: ------------------------------------------------------- > damn… i have always tried to plug my way to both > retained earnings and cta. should you use average > rate for retained earnings as aarg suggests? Yes, remember that RE comes from the I/S, in which EVERYTHING is translated at the avg rate - hence RE would also be translated at the avg rate. Since the only B/S item under the all current method that is not translated at the current rate is common stock, there will be a difference btw translated assets and liab + Equity. That difference will be your CTA. Hope this makes sense.
I would think R/E is at the average rate since the IS is translated at the average rate for the current rate method. CTA is on the BS under Shareholder Equity, part of OCI, I believe. The plugs you are referring to are for the Temporal methold. CPK123 - pls help.
Yes, it does. Thanks.
youre correct, the plugs are for the temporal method… I even saw you were asking about the current method, dont know why my mind wandered to temporal… i just love that method so much i guess
So, here’s my next question given the discussion above. In the BSAS exam (Q14, PM) they ask they ask for the translation effect under the current method. I assumed that to mean the CTA and their answer has a different formula than discussed above. Does translation effect mean the exposure effect? I’m a bit confused … I guess my issue is relating to wording.
BSAS frequently seems to be going back to the Holding Effect and Flow Effect concepts from last year - which are not in this year’s curriculum. So … take it with a pinch of salt. if you still have questions - I have not done the BSAS myself thus far. On my schedule for later this week. Once I get to them I will let you know. Or you could post me the question with answer choices - so I can solve it (by email) to cpkrish123@gmail.com. This way I know I have seen ONLY that question - and not seen following or before questions - and not seen the answer choices either.