See notes below Ssim-Tech Mexico Ssim-Tech Mexico Temporal Method Peso in Millions $ Consolidated Statement of Financial Position Assets Cash Accounts receivable Inventories Fixed assets 12/31/16 $ Total Assets $ Liabilities and Stockholders Equity Accounts payable Long-term debt Capital stock see note #1 below Retained earnings Translation adjustment- cumulative (Note #2) Total Liabilities and Stockholders Equity $ Net Income $ Retained earnings 1/1 Less Dividends Retained earnings 12/31 $ 300,000 1,300,000 1,200,000 9,000,000 11,800,000 2,200,000 4,400,000 2,000,000 3,200,000 11,800,000 1,130,000 2,760,000 690,000 3,200,000 Peso in Millions $ 42,735 Consolidated Statement of Profit or Loss Continuing Operations Revenue $ 9,600,000 Cost of sales (5,620,000) Depreciation (1,000,000) Other Expenses (1,500,000) Aggregate exchange gain or (loss) 0 Profit Before Tax $ 1,480,000 Income Tax Expense $ (350,000) Profit for the Year from Continuing Operations $ 1,130,000 Notes: #1 Capital stock was acquired at a rate of 10.8 Pesos to the US Dollar in 2005 #2 Cumulative translation is a "plug" value when the method for translation does not change That means take"Total Assets" and subtract the "Total Liabilities and Stockholders Equity" value and add the diffe If Total Assets do not equal Total Liabilities and Stockholders Equity you did something wrong #3 Inventories purchased in 4th quarter 2017 $ 6,250,000 #4 Retained earnings compost weighted average .07 pesos Total Assets $ Total Liabilities and Stockholders Equity $ - $ https://www.x-rates.com/average/?from=MXN&to=USD&amount=1.00&year=2017 - Restated in US $$ Exchange Rate 12/31/17 $ $ $ $ $ 600,000 1,600,000 1,500,000 9,000,000 12,700,000 $ $ $ 2,100,000 4,000,000 2,000,000 4,600,000 $ $ $ $ $ 12,700,000 2,090,000 3,200,000 690,000 4,600,000 - $ - $ - $ Restated in US $$ $ 43,100 $ 11,000,000 (5,950,000) (1,000,000) (1,493,000) $ 2,557,000 $ (467,000) $ 2,090,000 Current Method Income >>>>> value and add the difference into cell E17 Restated value from cell E11 does not change olders Equity" value and add the difference into cell E17 something wrong $ - $ 6,250,000 2017 Exchange rate One Peso = US $$ 0.046856 0.049257 0.051774 0.053379 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average Rate = 2017 2017 4th Q avg rate 2005 Historical rate Retained earnings composite rate Depreciation composite rate 0.053256 0.055022 0.056067 0.056194 0.056124 0.053167 0.052773 0.052095 0.000000 0.052678 0.108000 0.07000 0.07000 https://www.x-rates.com/average/?from=MXN&to=USD&amount=1.00&year=2017 Cost of sales calculations Beginning Inventories 1/1 Purchases Cost of goods avilable for sale Ending Inventories 1,200,000 6,250,000 7,450,000 1,500,000 Cost of Goods Sold 5,950,000 Aggregate exchange gain or (loss) Cash Accts Recv Monetary Assets 12/31/16 Less Monetary Liabilities $ Accts payable Long Term Debt Monetary Liabilities 12/31/16 Net Aggregate Exchange Gain or Loss Times change incurrent rate December 31, 2017 January 1, 2017 Times change incurrent rate Aggregate exchange gain or (loss) 300,000 Prior Year Balance 1,300,000 Prior Year Balance 1,600,000 2,200,000 2016 Balance 4,400,000 2016 Balance 6,600,000 $ (5,000,000) Exchange Rate 12/31 Current year Avg 4Q Current year 0 - = cell I34 * I38 Sources of monetary items Times change incurrent rate December 31, 2017 Average 2017 Times change incurrent rate Net Income $2,090,000 Depreciation 1,000,000 Total $ 3,090,000 Exchange Rate 0 Total Source change $ - = cell I45 * I49 Uses of monetary items Change in Inventory Dividends Total Times change incurrent rate December 31, 2017 Average 2017 Times change incurrent rate $300,000 690,000 990,000 Exchange rate Total Use change $ Grand Total $ - - = cell I56 * I60*-1 2016 Exchange rate One Peso = US $$ 0.055540 0.054165 0.056674 0.057180 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average Rate = 2016 2016 4th Q avg rate 2005 Historical rate Retained earnings composite rate Depreciation composite rate Current year 0.055217 0.053552 0.053856 0.054095 0.052110 0.052766 0.049818 0.048726 0.048877 0.050437 0.108000 0.07000 0.07000 $ - Avg 4Q 2016 Average 2017 Avg 4Q 2017 CURRENT–NONCURRENT METHOD Under the current–noncurrent method, a foreign subsidiary’s current assets (assets that are usually converted to cash within a year) and current liabilities (obligations that mature within a year) are translated into their parent company’s reporting currency at the current rate. Noncurrent assets and liabilities are translated at historical rates. Income statement items (except for depreciation and amortization charges) are translated at average rates applicable to each month of operation or on the basis of weighted averages covering the whole period being reported. Depreciation and amortization charges are translated at the historical rates in effect when the related assets were acquired. Unfortunately, this method does not often square with reality. Using the year-end rate to translate current assets implies that all foreign currency cash, receivables, and inventories are equally exposed to exchange risk; that is, will be worth more or less in parent currency if the exchange rate changes during the year. This is simply not true. For example, if the local price of inventory can be increased after a devaluation, its value is protected from currency exchange risk. On the other hand, translation of longterm debt at the historical rate shifts the impact of fluctuating currencies to the year of settlement. Many consider this to be at odds with reality as analysts are always assessing the current realizable values of a firm’s long-run obligations. Moreover, current and noncurrent definitions are merely a classification scheme, not a conceptual justification, of which rates to use in translation. TEMPORAL METHOD With the temporal method, currency translation does not change the attribute of an item being measured; it only changes the unit of measure. In other words, translation of foreign balances restates the currency denomination of these items, but not their actual valuation. Under U.S. GAAP, cash is measured in terms of the amount owned at the balance sheet date. Receivables and payables are stated at amounts expected to be received or paid when due. Other assets and liabilities are measured at money prices that prevailed when the items were acquired or incurred (historical prices). Some, however, are measured at prices prevailing as of the financial statement date (current prices), such as inventories under the lower of cost or market rule. In short, a time dimension is associated with these money values. In the temporal method, monetary items such as cash, receivables, and payables are translated at the current rate. Nonmonetary items are translated at rates that preserve their original measurement bases. Specifically, assets carried on the foreign currency statements at historical cost are translated at the historical rate. Why? Because historical cost in foreign currency translated by a historical exchange rate yields historical cost in domestic currency. Similarly, nonmonetary items carried abroad at current values are translated at the current rate because current value in foreign currency translated by a current exchange rate produces current value in domestic currency. Revenue and expense items are translated at rates that prevailed when the underlying transactions took place, although average rates are suggested when revenue or expense transactions are voluminous. When nonmonetary items abroad are valued at historical cost, the translation procedures resulting from the temporal method are virtually identical to those produced by the monetary–nonmonetary method. The two translation methods differ only if other asset valuation bases are employed, such as replacement cost, market values, or discounted cash flows. Because it is similar to the monetary–nonmonetary method, the temporal method shares most of its advantages and disadvantages. In deliberately ignoring local inflation, this method shares a limitation with the other translation methods discussed. (Of course, historical cost accounting ignores inflation as well!). All four methods just described have been used in the United States at one time or another and can be found today in various countries. In general, they produce noticeably different foreign currency translation results. The first three methods (i.e., the current rate, current–noncurrent, and monetary–nonmonetary) are predicated on identifying which assets and liabilities are exposed to, or sheltered from, currency exchange risk. The translation methodology is then applied consistent with this distinction. The current rate method presumes that the entire foreign operation is exposed to exchange rate risk since all assets and liabilities are translated at the year-end exchange rate. The current–noncurrent rate method presumes that only the current assets and liabilities are so exposed, while the monetary–nonmonetary method presumes that monetary assets and liabilities are exposed. In contrast, the temporal method is designed to preserve the underlying theoretical basis of accounting measurement used in preparing the financial statements being translated.
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