Global Finance 377exchange rates and (2) the inclusion of translation adjustments in shareholders’
equity marks it as using the all-current translation method.
Unlike H.J. Heinz, Storage Technology declares that the functional cur-
rencyof its foreign subsidiaries is the U.S. dollar,not the local foreign cur-
rency. The explanation for this condition is found it its reference to significant
volume of inter-company transactions and the manufacture of most of its prod-
ucts in the United States. As with H.J. Heinz, Storage Technology does not
identify the translation method it is using. However, the fact that the U.S. dol-
lar is the functional currency of its foreign subsidiaries determines that it must
be the temporal method. Moreover, it describes its method as translating mon-
etary assets and liabilities at year-end exchange rates and nonmonetary items at
EXHIBIT 12.14 Alternative translation methods.
All-Current Translation Method
The all-current translation method is the standard procedure applied to foreign subsidiaries
whose operations are conducted in the local foreign currency. That is, the local currency is the
subsidiar y’sfunctional currency. The local foreign currency is expected to be the functional
currency when the foreign subsidiary’s operations are “relatively self-contained and
integrated within a particular country.” A further requirement for use of the all-current
method is that the subsidiary not be located in a country that has experienced cumulative
inf lation over the previous three-year period of 100% or more. The logic is that meaningful
results cannot be produced under these conditions by simply multiplying the foreign
currency balances by current exchange rates.
- All asset and liability balances are translated at the current or end-of-period exchange
rate. - Paid-in capital is translated at the exchange rate when the funds were raised.
- Revenues and expenses are translated at the average exchange rate for the current
period. - The translation adjustment is included in other comprehensive income.
Temporal (Remeasurement) Translation Method
This method is applied in those cases where the local foreign currency is not the functional
currency of the subsidiary. The functional currency is defined as “the currency of the
primary economic environment in which the entity operates; normally, that is the currency
of the environment in which the entity generates and spends cash.” Moreover, as noted
above, “A currency in a highly inf lationary environment is not considered stable enough to
serve as a functional currency and the more stable currency of the reporting parent is to be
used instead.”
- All monetary assets and liabilities are remeasured at current exchange rates.
- All nonmonetary assets, liabilities, and equity balances are remeasured at historical
exchange rates. - Revenues and expenses are remeasured at average exchange rates for the period.
However, cost of sales and depreciation are remeasured at the same rates used to
remeasure the related inventory and fixed assets, respectively. - The remeasurement gain or loss is included in realized net income.