Page 63 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

Vibrant is relatively self-contained, which likely means the local
is the functional currency. Since the functional currency ≠ the READING 16: MULTINATIONAL OPERATIONS
parent’s presentation currency, the current rate method is used
to translate Vibrant’s financial statements from the functional
currency to the parent’s presentation currency. MODULE 16.5: EXAMPLE

The current rate method uses the current rate for all balance sheet accounts (except common stock, which is translated at the historical rate) and the average
rate for all income statement accounts.
The translation gain or loss is included in the CTA, which is reported in the equity section of the balance sheet as a part of other comprehensive income.

Vibrant’s translated 2015 income statement is shown in the following table. Notice that we translate the income statement first with the current rate method to
derive net income, which we then use to calculate retained earnings on the balance sheet.

Notice the change in the CTA from 2014 to 2015 is equal to –$37.9 (–
$37.9 ending CTA − $0 beginning CTA). Because Vibrant was acquired
at the end of 2014, the CTA was zero on that date.

Thus, the depreciating loca resulted in translation loss of $37.9 for the
year ended 2015. The translation loss occurred because Vibrant had a
net asset exposure (assets > liabilities) and the loca depreciated
relative to the dollar.