Redline Products, Inc. is a US-based multinational with subsidiaries around the world. One such subsidiary, Acceletron, operates in Singapore, which has seen mild but not excessive rates of inflation. Acceletron was acquired in 2000 and has never paid a dividend. It records inventory using the FIFO method.
Chief Financial Officer Margot Villiers was asked by Redline’s board of directors to explain how the functional currency selection and other accounting choices affect Redline’s consolidated financial statements. Villiers gathers Acceletron’s financial statements denominated in Singapore dollars (SGD) in Exhibit 1 and the US dollar/Singapore dollar exchange rates in Exhibit 2. She does not intend to identify the functional currency actually in use but rather to use Acceletron as an example of how the choice of functional currency affects the consolidated statements.
Exhibit 1:
Selected Financial Data for Acceletron, 31 December 2007 (SGD millions)
| Cash | SGD125 |
|---|---|
| Accounts receivable | 230 |
| Inventory | 500 |
| Fixed assets | 1,640 |
| Accumulated depreciation | (205) |
| Total assets | SGD2,290 |
| Accounts payable | 185 |
| Long-term debt | 200 |
| Common stock | 620 |
| Retained earnings | 1,285 |
| Total liabilities and equity | 2,290 |
| Total revenues | SGD4,800 |
| Net income | SGD450 |
Exhibit 2:
Exchange Rates Applicable to Acceletron
| Exchange Rate in Effect at Specific Times | USD per SGD |
|---|---|
| Rate when first SGD1 billion of fixed assets were acquired | 0.568 |
| Rate when remaining SGD640 million of fixed assets were acquired | 0.606 |
| Rate when long-term debt was issued | 0.588 |
| 31 December 2006 | 0.649 |
| Weighted-average rate when inventory was acquired | 0.654 |
| Average rate in 2007 | 0.662 |
| 31 December 2007 | 0.671 |
If the current rate method is used to translate Acceletron’s financial statements into US dollars, Redline’s consolidated financial statements will most likely include Acceletron’s:
A. USD3,178 million in revenues.
B. USD118 million in long-term debt.
C. negative translation adjustment to shareholder equity.
Answer: A is correct . Under the current rate method, revenue is translated at the average rate for the year, SGD4,800 × 0.662 = USD3,178 million. Debt should be translated at the current rate, SGD200 × 0.671 = USD134 million. Under the current rate method, Acceletron would have a net asset balance sheet exposure. Because the Singapore dollar has been strengthening against the US dollar, the translation adjustment would be positive rather than negative.
Could someone explain how Acceletron has a net asset balance sheet exposure?