Thank you for your great article, “Currency Translation Adjustments” (July 08, page 42). I used it as a learning opportunity for our International Accounting group.
I have one question on a calculation on page 46 in the right-hand column toward the bottom: “To examine a situation where the dollar has strengthened, the FX rates shown in Exhibit 5 may be used in Exhibit 4. This should result in a debit balance in CTA of $64,850 in OCI. The strengthening of the dollar reduces net income by $3,900, a 6% reduction in net income reported from the subsidiary.” [Emphasis added]
In substituting the Exhibit 5 weighted average rate of 0.0093 for the weaker dollar weighted average rate of 0.0096 in Exhibit 4, the net income from operations changes from $62,400 to $60,450, a decline of $1,950 or 3%. The only way I see of reducing net income by $3,900 (6%) to $58,500 is by using a weighted average rate of 0.0090 (6,500,000FC 0.0090 $58,500).
How did the authors arrive at the $3,900 reduction in net income using a weighted average rate of 0.0093 (the one used in Exhibit 5)?
Many thanks for this powerful article.
Richard Hardesty, CPA
Authors’ Reply: We were excited to hear that others are using this as a discussion tool. We apologize if the sentence wasn’t clear. If you leave all of the other rates the same in Exhibit 5 and change the weighted average rate in B22 to match the historical rate of 0.0099 $/Foreign Currency, the income would have been $64,350 as shown below.
currency FX Rate In US $
Net Income 6,500,000 0.0093 60,450 Per the worksheet
Net Income 6,500,000 0.0093 64,350 If the $ had not weakened
Decrease in (3,900)
The effect on income can be defined different ways. Some companies, like McDonald’s, discuss results in terms of constant currency and use prior-year average rates.
We hope this better explains what we meant.
Susan M. Sorensen, CPA, Ph.D.,
and Donald L. Kyle, CPA, Ph.D.