Analyse how exchange rate movements change the translated sales of a subsidiary and of its parent
The idea
Reported growth in a foreign subsidiary's sales mixes local business growth with the currency move. Translated sales growth equals (1 + local currency growth) × (1 + change in the foreign currency's value against the presentation currency) − 1, where the change is measured using the rate in presentation currency per unit of foreign currency. A subsidiary can grow strongly in its own currency and still show falling sales in the parent's accounts if its currency weakens enough. Analysts strip out the currency effect, often by restating the current year at last year's rates. The trap is quoting the rate the wrong way round, which flips the sign of the effect.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Contrast presentation (reporting), functional and local currencies
- Explain exposure to foreign currency transactions, including how the resulting gains and losses are accounted for and disclosed
- Contrast the current rate and temporal methods, assess the effect of each on the parent's income statement and balance sheet, and decide which method fits a given situation
- Work out translation effects and assess how the income statement and balance sheet of a subsidiary are restated in the parent's presentation currency
- Analyse the effects of the current rate and temporal methods on financial statements and ratios
- Analyse how the different ways of translating subsidiaries in hyperinflationary economies change financial statements and ratios
- Explain how operating across countries changes a company's effective tax rate
- Explain how shifts in what drives sales bear on whether sales growth can be sustained
- Analyse the possible impact of currency movements on results, given the countries where a company operates