384 Planning and Forecasting
the temporal method. The working capital ratio differs because inventory is
translated at a rate of only $0.62 under remeasurement, but at $0.65 with
translation under the all-current method. The debt-to-equity ratio is higher
with the remeasured statements because of the remeasurement loss under the
temporal method, but a translation gain under the all-current method. Pre-
serving the relationships of the foreign-currency statements in the translated
statements is seen to be a desirable feature of translation under the all-current
method.
Effects of Exchange Rate Changes not Captured by
Translation and Remeasurement
It is common for firms to comment on the effects of exchange-rate changes on
key financial statement items. In particular, the effects of exchange-rate
changes on the growth or decline in sales are frequently commented upon in
Management’s Discussion and Analysis (MD&A).
The processes of translation and remeasurement summarize the joint ef-
fects of currency exposure and exchange rate changes in a single summar y sta-
tistic. However, there are other effects associated with changing exchange rates
that are not set out separately in any financial statement. For example, assume
that the physical volume of sales and local-currency sales prices are unchanged
for a foreign subsidiary. If the currency of the country in which the subsidiary
is located depreciates in value, then the translated amount of sales revenue will
decline. If the product being sold is manufactured in the foreign country, then
there should also be a partially offsetting decline in cost of sales.^33
The disclosures in Exhibit 12.22 attempt to identify the effect of changing
exchange rates on sales and profits. Galey & Lord’s disclosure identifies a com-
mon concern about the dollar appreciating in value: it makes U.S. goods more ex-
pensive in the export market. This point is echoed by Illinois Tool Works and its
disclosure that its operating revenues were reduced each of the last three years
because of the strengthening of the U.S. dollar. Revenue reductions associated
with a strengthened dollar normally come from a combination of (1) foreign sales
EXHIBIT 12.21 Key statement relationships under translation versus
remeasurement.
In the FC
Measurement Statements Translation Remeasurement
Working capital ratioa 1.50/1 1.50/1 1.45/1
Gross margin 40% 40% 40%
Debt to equityb .86/1 .86/1 1.11/1
aOnly the accounts payable are included in current liabilities.
bDebt includes only the notes payable. Equity under the all-current method includes accumulated
other comprehensive income.