Currency Translator Calculation and Adjustment Process
Currency Translator automatically calculates the exchange data for all currency accounts simultaneously. When necessary, it adjusts the accounts so that your model remains balanced. It places the adjustments in special accounts where you can review them.
Note:
Currency Translator assumes all financial data in a file share one currency. To use data in several currencies, change foreign currency entries to the operational currency before translating the file.
Currency Translator adjustment information is in several reports: Funds Flow, Direct Cash Flow, Indirect Cash Flow, and FAS 95—See Currency Translator Information in Other Reports.
Remeasurement for High Inflation
Currency Translator supports FASB 52, so fluctuations in the exchange rates are recorded as equity, not income. If you are modeling a company in a country with high inflation and the parent company is in a country with low inflation, re-measure the company financial statements before translation.
After re-measuring, you can translate all financial statements using one exchange rate: Currency Translator will not calculate the income effect. This is useful for companies presenting last year's financial data based on the current year's currency.
Adjustment Exceptions
When the adjustments are complex, Currency Translator adjusts translated data in a unique manner as described in this topic.
Fixed Assets
Currency Translator makes a special adjustment when the fixed asset formula is:
| Fixed Assets = | Fixed assets (prior period) |
|---|---|
|
+ Fixed Capital Investment (FCI) |
|
|
? Retirements |
Example:
| Item | Deutschemarks | Rate | Dollars | Rate Info |
|---|---|---|---|---|
|
Fixed assets (year 1) |
6000 |
.75 |
4500 |
year-end rate (year 1) |
|
FCI (year 2) |
700 |
.72 |
504 |
weighted average rate |
|
Retirements (year 2) |
(600) |
.72 |
(432) |
weighted average rate |
|
Fixed assets (year 2) |
6100 |
.60 |
3660 |
year-end rate (year 2) |
The fixed assets formula expressed in dollars does not balance, that is, 4500 + 504 - 432 - 3660. Currency Translator adjusts the amount and store the adjustment in Adjustment to Fixed Assets (v2170.4.000).
Following is the adjustment formula:
| Adjustment to Fixed Assets = | Fixed Assets | 3660 |
|---|---|---|
|
- Fixed assets (prior period) |
4500 |
|
|
- Fixed Capital Investments |
504 |
|
|
+ Retirements |
432 |
|
|
Result |
- 912 |
Accumulated Depreciation
Currency Translator makes a special adjustment when the accumulated depreciation formula is:
| Accumulated Depreciation = | Accumulated depreciation (prior period) |
|---|---|
|
+ Depreciation expense (Funds) |
|
|
Accumulated depreciation on retirements |
Example:
| Depreciation | Deutschemarks | Rate | Dollars | Rate |
|---|---|---|---|---|
|
Acc. Dep. (year 1) |
1200 |
.75 |
900 |
year-end rate (year 1) |
|
Depr. exp. (year 2) |
1220 |
.72 |
878.4 |
weighted average rate |
|
Retirements (year 2) |
(120) |
.72 |
(86.4) |
weighted average rate |
|
Acc. Dep. (year 2) |
2300 |
.60 |
1380 |
year-end rate (year 2) |
In this circumstance, Depreciation Expense: Funds = Depreciation Expense: Book before translation but not after, so the dollars column is not balanced. Currency Translator adjusts depreciation expense to correct the imbalance by adding -312 to 878.4, and stores the adjustment value in the Adjustment to Accumulated Depreciation (v2190.4.000) account.
The adjustment formula:
| Adjustment to Accumulated Depreciation = | Accumulated depreciation |
|---|---|
|
- Accumulated depreciation (prior paid) |
|
|
- Depreciation expense (funds) |
|
|
+ Accumulated depreciation on retirements |
Fixed Asset Accounts
Unlike cash accounts, fixed-asset accounts rely on additions and retirements, so Currency Translator adjusts them differently. For example, Goodwill:
| Goodwill = | Goodwill (prior period) |
|---|---|
|
+ Additions to goodwill |
|
|
- Amortization of goodwill |
Currency Translator adjusts it:
| Adjustment to Goodwill = | Goodwill |
|---|---|
|
- Goodwill (prior period) |
|
|
- Additions to goodwill |
|
|
+ Amortization of goodwill |
The Goodwill adjustment value is stored in the Adjustment to Goodwill (v2400.4.000) account.
Currency Translator adjusts the other fixed-asset accounts as follows:
Other Intangibles
| Adjustment to Other Intangibles = | Other intangibles |
|---|---|
|
- Other intangibles (prior period) |
|
|
- Additions to other intangibles |
|
|
+ Amortization of other intangibles |
|
|
Adjustment to other intangibles |
Long-Term Debt
| Adjustment to Long-Term Debt = | Long-term debt: scheduled |
|---|---|
|
- Long-term debt: scheduled (prior period) |
|
|
- Increase in long-term debt: scheduled |
|
|
- Non-cash interest on long-term debt: scheduled |
|
|
Long-term Debt |
Investment Equity Method
Adjustment to Inv. Eq. Method =
-
Investments: equity method
-
Investments: equity method (prior period)
-
Increase in Investments: equity method
-
Dividends from subsidiaries
-
+ Earnings from investments: equity
-
Adjustment to Inv. Equity
Currency Translator, Cash Flow and Valuation
Cash Flow from Operations
Currency Translator neither creates nor destroys cash flows when translating one currency to another—it applies an exchange rate to Cash Flow from Operations and translates directly. It does the same for the items constituting Cash Flow from Operations, which can cause an imbalance. To rebalance, Currency Translator makes an adjustment and stores the adjustment value in the Cash Flow Adjustment: Currency (v4090) account.
Present Value of Cash Flow
Currency Translator neither creates nor destroys values when translating from one currency to another—it applies the year-end exchange rate from the last year in history to Present Value of Cash Flow and translates it directly.
Note:
You can change the exchange rate.
Cost of Capital
Because Currency Translator translates both the Cash Flow from Operations and Present Value of Cash Flow directly, it can calculate the Cost of Capital for each period. The Cost of Capital may be different after translation because it reflects the original currency's economic factors. After translation, it should balance the future and present values of the cash flows.
Future Value of Residual Value
Currency Translator translates the Future Value of Residual Value directly—it applies the year-end exchange rate from the last year in forecast period to Future Value of Residual Value and translates it directly.
Note:
You can reassign the exchange rate if needed.
Currency Translator calculates the residual value based on the method you select—see Modeling Valuation Accounts. In some circumstances, it may be necessary to use a value when translating data—see Shareholder Value and Dividend Discount Method.
Shareholder Value and Dividend Discount Method
These are the residual value methods and values used:
| Method | Specific Value |
|---|---|
|
Perpetuity Method |
Long-term cost of capital |
|
Growth in Perpetuity |
Long-term cost of capital |
|
Value Growth Duration |
Long-term cost of capital |
|
Price/Earnings Ratio |
Normalized earnings adjustment |
|
Market-to-Book Ratio |
Market-to-book ratio |
|
Liquidation Value |
Liquidation value |
Economic Profit
Economic profit only supports the perpetuity method, and its value is the residual NOPAT adjustment.
Revaluation
Currency Translator distinguishes between actual increases and decreases in balance sheet accounts and period-to-period changes caused by currency fluctuations. For example:
| Cash | 2003 | 2004 |
|---|---|---|
|
Cash |
$100 |
$150 |
|
Increase in cash |
$50 |
If you translate the preceding dollar amounts to French Francs using these exchange rates:
| Year | Exchange |
|---|---|
|
2003 |
4 FF per $1 |
|
2004 |
5 FF per $1 |
After translation, the data is:
| Amount | 2003 | 2004 |
|---|---|---|
|
Cash |
FF400 |
FF750 |
|
Increase in cash |
FF250 ($50 x 5) |
After translation, the increase in cash is incorrect because of the currency fluctuation—it should be FF350. Currency Translator adjusts for the fluctuation, in this case adding FF100, and notes the adjustment value in the Adjustment To Cash (v2000.04.000) account.
Most balance sheet accounts must be adjusted similarly, and adjustment values recorded in additional .04 accounts. Currency Translator sometimes makes different adjustments—see Translation Adjustment.
Translation Adjustment
Currency Translator translates most balance sheet accounts at the year-end exchange rate. It translates equity accounts using the equity historical exchange rate. In forecast periods, it does not translate retained earnings, but translates the weighted average of the items constituting retained earnings. Because the use of different exchange rates causes an imbalance, Currency Translator adjusts the data.
If you do not use the default exchange rate assignments (see Setting Exchange Rates for Currency Translations), Currency Translator uses this formula to calculate CTA:
| CTA = | Total assets after translation |
|---|---|
|
- Total liabilities after translations earnings |
|
|
- Equity after translation |
|
|
Currency Translation Adjustment |
Currency Translator enters the value in the currency translation adjustment account, in the equity section of the balance sheet. Period-to-period changes appear on the cash and funds flow reports.
Note:
The account does not have an analysis trail because the data is not available after translation.
In Dollars (U.S.)
| Cash | 2003 | Type | 2004 |
|---|---|---|---|
|
Cash |
100 |
Cash |
100 |
|
Debt |
100 |
Retained Earnings |
100 |
|
Sales |
100 |
The cash from sales pays the debt.
| Period end rate | 2003 | 4 |
|---|---|---|
|
Weighted avg. rate |
2004 |
5 |
|
Period end rate |
2004 |
6 |
After the translation:
| Cash or Dept | 2003 | Type | 2004 |
|---|---|---|---|
|
Cash |
400 |
Cash |
600 |
|
Debt |
400 |
Retained Earnings |
500 |
|
Adjustment |
100 |
||
|
Sales |
500 |