The schweser notes mention equity taken as a whole under current rate method has to be translated using the current exchange rate.
but under the current rate the components of equity are gonna be supplied at average rate( retained earnings) and historical rate( stocks) . How does this make sense? I see a discrepancy here, am i wrong?
I’m not quite sure about the first part of your statement, but total equity will be = capital stock (Historical Rate) + Retained Earnings (from I/S) + Cumulative Translation Adjustment
I think you are not accounting for the CTA in the above.
The schweser notes mention equity taken as a whole under current rate method has to be translated using the current exchange rate… this statement is right( if schweser isnt wrong) … just so that u know …
and yeah plug element balances the equation and the plug can be calculated using only the equity as i see it( because the first statement is correct) … entire balance sheet translation is not required to calculate it
Do you mean the BS will be translated at the current rate, with the execption of common stock? I’m not clear on what you mean.
Maybe reference the page number in the book and we can take a look and see if they are wrong?
schweser book 2, page 132, figure 3, row 4 … equity(taken as a whole) has to be translated at current rate and they have starred it and mention as a special point. now i think it is correct. CTA balances the things so as to make total equity translation at current rate okay.
This is how I understood it: All components of Equity are remeasured at the current rate except:
Common stock–>historical rate
Retained earnings–>change in RE sourced from income statement (at average rate)
Yup, that should be correct; see also CFAI Notes p. 244-245.
Firstly, translate alle I/S positions at the average rate. Secondly, translate the dividends at the historical rate when they were declared. Thirdly, ending RE are calculated: NI minus dividends. Fourthly, B/S items (assets and liabilities) are translated using the current rate. Fifthly, capital stock is translated using the historical rate and RE are from “thirdly” (the I/S). Sixthly, the translations adjustment is calculated and presented as a part of S/Hs’ equity section.
Under current rate method,
step 1: translate directly income statement using average rate & you have net income
step 2: translate directly assets and liabilities using current rate
step 3: compute equity using formula: equity = assets - liabilities
step 4: translate remaining components of equity
Capital stock is to be translated using historical ex.rate
Dividends is to be translated using ex.rate when dividends were declared
step 5: compute translation adjustment using formula:
Translation adjustment = computed equity - capital stock - (beginning Retained earnings + net income - dividend)
So what the book wants to emphasize is you have to compute equity as a whole first using the results of assets and liabilities translated at current rate before finally calculating translation adjustment.
Well said. Makes it clear, why / where certain items are being translated at different rates if you think about it logically. Thanks