CRM - Translate Income Statement first. Compute your change in RI by deducting dividends from the NI figure you come up with. Add that to your previous year’s RI to computer ending RI. Take that over to your Balance Sheet. Translate your Balance Sheet. Use the previously computed RI. Find the number that balances your Balance Sheet (Total Equity - Capital Stock - RI). That is your Cumulative Translation Adjustment.
TM - Translate the Balance Sheet first. Find your RI that balances your Balance Sheet. From that, find your NI AFTER the translation adjustement (I do it this way … Ending RI - Beginning RI + Dividends). Take this figure over to your Income Statement (goes all the way at the bottom). Translate your Income Statement to find your NI BEFORE translation adjustement. The difference between BEFORE and AFTER is your Translation Gain or Loss.
TM is a bit harder to visualize … so here some example numbers at the bottom.
50,000 [NI Before Translation Adjustment (calculated from translating all the Income Statament items)]
-10,000
40,000 [NI After Translation Adjustment (calculated from your Balance Sheet change in RI)]
Edit - Hopefully we’re not asked to do this on the exam, but if we are, hopefully it’s the CRM. It’s a lot more straightforward (to me anyways).
Correct. It comes from the change in Retained Earnings you found from translating your Balance Sheet and accounting for dividends. That is your true ending NI. The difference between this and the NI you get from translating the Income Statament is your gain/loss.
By the way, IF this comes up on the exam for a TM calculation, we may get a gift in the answers. Before doing any of these calculations, check the net monetary asset/liability positions and check the direction exchange rates went during the period. Assuming net monetary liability exposure, and exchange rates rose , you know you’re going to have a loss. If two answer choices are positive and one is negative, you know the answer without any calculations. The reverse would be true if rates fell (two negative choices and one positive).
I could see an exam question writer doing this to test your understanding of net monetary asset/liability exposure and get you to waste time fumbling with calculations. In fact, I feel like this was done on one of the topic tests.
Yeah it’s even easier for the CRM. For the CRM, we’re looking at net asset/liability exposure (both monetary and non-monetary). Since a company should always have a net asset position (still a good idea to check the exhibit given), we know that a gain loss will have a direct relationship with the direction of exchange rates. Rates up, CTA gain. Rates down, CTA loss. Check the answer choices and hope two are one way and one is the other.
Then do a fist pump without attracting the attention of the exam proctors and move on to the next question. Okay, don’t do that.
Oh, last thing I forgot to mention regarding translation using the TM. If you have Schweser, Practice Exam Vol 1, Exam 3, morning session has a great example of this process in question #22.
