Reference no: EM13692742

Question 4
a)(i) Explain what balance sheet exposure and transaction exposure are and the difference between them.
(ii) Explain what a translation adjustment is and the circumstances under which it would net to a zero balance.
(8 marks)
b) FT Pte Ltd is a UK subsidiary of a Singaporean company, Patriot Pte Ltd. Extracted from FT Pte Ltd's financial statements is the following:
British Pounds (GBP)
Beginning inventory £200,000
Purchases 800,000
Ending Inventory 100,000
Cost of Goods Sold 900,000
The Singaporean dollar ($ SGD) exchange rates for 1 GBP over the year are as follows:
January 1 £2.00 GBP
Average for the year 1.98
December 31 1.94
The beginning inventory was bought during the last quarter of the previous year when the exchange rate was $1SGD = £2.01 GBP. The ending inventory was acquired in the last quarter of the current year when the exchange rate was $1SGD = £1.96 GBP.
Required:
Demonstrate the different ways in which financial statements can be translated by:
(i) Using the current rate method of translation to determine the amounts at which the UK subsidiary's ending inventory and cost of goods sold should be included in Patriot Pte Ltd's consolidated financial statements.
(ii) Using the temporal method of translation to determine the amounts at which the UK subsidiary's ending inventory and cost of goods sold should be included in Patriot Pte Ltd's consolidated financial statements.
(12 marks)
c) Suppose Patriot Pte Ltd is looking to expand and is considering the acquisition of SUL Pte Ltd, another UK company. Before doing so, the CFO was asked to prepare an analysis of SUL Pte Ltd's financial statements to determine their cash flows, performance and position, and also to compare SUL Pte Ltd against similar companies in Singapore. Before she can start, she needs to translate the financial statement into Singapore Dollars. Do you think Patriot Pte Ltd should use the current rate method, the temporal method or some other method to translate SUL Pte Ltd's financial statements? Explain the reasons.
(5 marks)