BY RICHARD HARDESTY

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
Seattle

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.

In Foreign
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)
earnings

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.
Houston