Accounting Treatment Summary Assignment
.docx
School
Texas A&M University**We aren't endorsed by this school
Course
ACCT 315
Subject
Accounting
Date
Jan 3, 2025
Pages
2
Uploaded by DoctorStarlingMaster1220
Accounting Treatment Summary AssignmentWhen a parent company translates the financial statements of a foreign subsidiary, two main methods can be used: the translation method and the remeasurement method. The choice between these methods depends on the economic situation of the subsidiary.Circumstances Under Which Each Method Is AppropriateThe translation method is typically used when the subsidiary operates in a stable economy where the local currency is functional. In this method, assets and liabilities are translated using the exchange rate at the balance sheet date, while income statement items are translated using the average exchange rate for the period. This method works best when the local currency is stable and reliable.The remeasurement method is used when the subsidiary operates in an economy that is unstable or highly inflationary, where the local currency is not stable. In these cases, the subsidiary’s functional currency is usually the parent company’s currency. This method translates monetary items using the current exchange rate, non-monetary items using historical exchange rates, and income statement items at the average exchange rate.Advantages and DisadvantagesThe translation method is simpler because it applies consistent exchange rates for all assets, liabilities, and income statement items. However, it can cause fluctuations in the parent company’s financial statements due to changes in exchange rates, which can make the numbers look inconsistent over time.On the other hand, the remeasurement method is better at reflecting the true financial situation of the subsidiary in unstable environments. It uses different exchange rates for different types of items, which can be more accurate in situations where the local currency is volatile. However, it’s more complicated and can lead to unexpected changes in the income statement, making the parent company’s financial results harder to predict.Accounting Procedures and Journal EntriesUnder the translation method, assets and liabilities are translated at the current exchange rate, and income and expenses are translated at the average rate for the period. Any differences that come from translation are recorded in equity, in a section called Cumulative Translation Adjustment (CTA). These differences do not affect the income statement until the subsidiary is sold or liquidated.Under the remeasurement method, assets and liabilities are translated at the current exchange rate, while non-monetary items are translated using historical rates. Income and expenses are translated at the average rate for the period, and any resulting gains or losses are recognized in the income statement.
