376 Planning and Forecasting
same exchange rate. Translation would simply amount to a scaling of the state-
ments of the foreign subsidiary.
However, each of the translation alternatives requires the translation of
some balances at different exchange rates. In accounting parlance, this throws
the books out of balance. The amount by which the books are thrown out of
balance by translation is termed the translation adjustment or remeasurement
gain or loss, depending upon the translation process being applied. In the pro-
cess of illustrating statement translation, the creation and interpretation of
these translation balances will be discussed.
TRANSLATION ALTERNATIVES
There are two different translation methods under current GAAP. However,
the second method is technically a remeasurement method as opposed to a
translation method. As translation methods, the two alternatives are called the
(1) all-current and (2) temporal methods, respectively. The key features of
these two methods are summarized in Exhibit 12.14.
Examples of accounting policy notes describing the use of each of these
translation policies are provided below:
The all-current translation method: H.J. Heinz Company (1999)
For all significant foreign operations, the functional currency is the local cur-
rency. Assets and liabilities of these operations are translated at the exchange
rate in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are in-
cluded as a component of shareholders’ equity.The temporal remeasurement (translation) method:
Storage Technology Corp. (1999)The functional currency for StorageTek’s foreign subsidiaries is the U.S. dollar,
ref lecting the significant volume of intercompany transactions and associated
cash f lows that result from the fact that the majority of the Company’s storage
products sold worldwide are manufactured in the United States. Accordingly,
monetary assets and liabilities are translated at year-end exchange rates, while
non-monetary items are translated at historical exchange rates. Revenue and ex-
penses are translated at the average exchange rates in effect during the year,
except for cost of revenue, depreciation, and amortization that are translated at
historical exchange rates.The key to the determination of the use of the all-current translation
method by H.J. Heinz is its statement that the functional currency is the local
currencyfor its foreign subsidiaries. That is, these subsidiaries conduct their op-
erations in their local currency. The company does not identify its translation
method as all current, but the combination of (1) the use of year-end, or current,