| Course | FNCE 4103 International Finance |
|---|---|
| Week | Week 6 |
| Paper type | Translation exposure note |
| Length | About 810 words, 5 pages |
| Format | APA 7 student paper |
| School | Walden University |
| Program | BS in Business Administration |
| Updated | October 2026 |
Free sample paper for FNCE 4103 Week 6
Translating Lakeland's Hamburg Service Subsidiary Into Dollars: Why the Euro Is Its Functional Currency, the Current Rate Method Against the Temporal Method and What a 5 Percent Euro Fall Does to Reported Equity
Student Name
Walden University
FNCE 4103: International Finance
Instructor Name
Month Day, Year
Translating Lakeland's Hamburg Service Subsidiary Into Dollars: Why the Euro Is Its Functional Currency, the Current Rate Method Against the Temporal Method and What a 5 Percent Euro Fall Does to Reported Equity
The Subsidiary and Its Functional Currency
Lakeland GmbH is a composite Hamburg subsidiary of Lakeland Process Equipment that installs and services Lakeland production lines for European food processors. It invoices customers in euros, pays its engineers and rent in euros, borrows from a German bank in euros and finances itself largely from its own earnings. Under U.S. accounting rules for foreign currency, a subsidiary's functional currency is the one in which it mainly earns and spends its cash (Financial Accounting Standards Board [FASB], n.d.). Every indicator points to the euro, so the subsidiary's statements are translated into dollars using the current rate method. If Lakeland GmbH were merely an extension of the parent, buying in dollars and remitting all cash to Minneapolis, the dollar would be its functional currency, and the temporal method would apply.
The Restatement
The current rate method uses the year-end rate for everything the subsidiary owns and owes, keeps common stock at the rate on the day it was issued and converts the year's income at the period's average rate. The balancing difference, a loss of $70 thousand this year, goes to a cumulative translation adjustment in equity rather than through net income. Under the temporal method, cash, receivables and payables, the monetary items, use the closing rate, while inventory and property use the historical rates at which they were acquired; the resulting gain or loss would run through net income.
Table 1
Lakeland GmbH Balance Sheet Translated Into Dollars (in thousands)
| Account | Euros | Rate, current rate method | Dollars, current rate | Rate, temporal method | Dollars, temporal | |
|---|---|---|---|---|---|
| Cash | 1,200 | 1.0850 closing | 1,302 | 1.0850 closing | 1,302 | |
| Receivables | 2,400 | 1.0850 closing | 2,604 | 1.0850 closing | 2,604 | |
| Inventory, at cost | 3,000 | 1.0850 closing | 3,255 | 1.0900 historical | 3,270 | |
| Property and equipment | 4,400 | 1.0850 closing | 4,774 | 1.1000 historical | 4,840 | |
| Total assets | 11,000 | | 11,935 | | 12,016 | | ||
| Payables | 1,800 | 1.0850 closing | 1,953 | 1.0850 closing | 1,953 | |
| Bank loan | 3,200 | 1.0850 closing | 3,472 | 1.0850 closing | 3,472 | |
| Common stock | 4,000 | 1.1000 historical | 4,400 | 1.1000 historical | 4,400 | |
| Retained earnings | 2,000 | Translated history | 2,180 | Balancing figure | 2,191 | |
| Cumulative translation adjustment | | Equity, other comprehensive income | (70) | Not used | | |
Composite subsidiary; rates illustrative. Income statement items are translated at the year's average rate of 1.0800 under the current rate method.
What a 5 Percent Euro Fall Would Do
Under the current rate method, Lakeland's exposure is the subsidiary's net assets, €6,000 thousand. A 5 percent fall in the euro, from $1.0850 to about $1.0308, would reduce the dollar value of those net assets by about $325 thousand. That loss would appear in other comprehensive income and in the cumulative translation adjustment, not in net income. Under the temporal method, only the net monetary position is exposed. Lakeland GmbH's monetary liabilities exceed its monetary assets by €1,400 thousand, so a fall in the euro would produce a remeasurement gain of about $76 thousand, reported in net income.
Why the Two Methods Disagree
The methods disagree because they ask different questions. The current rate method treats the subsidiary as a self-contained euro business and asks what its net worth is in dollars today, so everything it owns and owes moves with the euro. The temporal method treats the subsidiary as an extension of the parent and asks what would happen if the parent itself held these euro items, so only items that will be settled in cash at current rates are exposed. A euro fall therefore produces a loss under one method and a gain under the other. Neither figure measures how the subsidiary's business will actually perform. The choice of method is not optional: it follows from the functional currency determination, which is why that determination is documented first.
Does the Translation Loss Matter?
Translation exposure changes reported equity, but it does not by itself change cash. The subsidiary's euro assets still earn euros, and no cash crosses the border because of translation. Shapiro and Hanouna (2019) argue that firms should not hedge translation exposure for its own sake, because doing so can create real cash losses to offset accounting losses that have no cash effect. Lakeland's treasurer should report the translation adjustment clearly to investors and lenders, but hedge only if a loan covenant is written on reported equity or if the company plans to bring the subsidiary's capital home soon, in which case the exposure becomes a cash exposure.
What Matters More
The more important question is whether a weaker euro would change the subsidiary's future cash flows, through its prices, its costs or its competitors. That is operating exposure, the subject of the next analysis, and it can be larger than either translation figure (Madura, 2021).
References
Financial Accounting Standards Board. (n.d.). Foreign currency matters (Topic 830). FASB Accounting Standards Codification. https://asc.fasb.org/
Madura, J. (2021). International financial management (14th ed.). Cengage Learning.
Shapiro, A. C., & Hanouna, P. (2019). Multinational financial management (11th ed.). Wiley.
Reading the FNCE 4103 Week 6 instructions
In Week 6 you explain how a foreign subsidiary's statements are translated and what that exposes. Begin by determining the subsidiary's functional currency and saying how you reached that conclusion, since the method follows from it. Present a restatement exhibit showing each balance sheet category, the rate applied and the translated amount, under the current rate method and, for comparison, the temporal method. Identify where the translation difference goes. Apply a stated currency move to show the exposure under each method. Explain whether the exposure affects cash and whether it should be hedged, and point to the economic exposure that matters more.
How the FNCE 4103 Week 6 example is put together
The note describes the Hamburg subsidiary and applies the functional currency indicators, citing FASB's foreign currency guidance. A ten-row table translates cash, receivables, inventory, property, payables, the bank loan, stock and retained earnings under both methods, with the cumulative translation adjustment shown. A section applies a 5 percent euro fall to net assets of €6.0 million and to a net monetary liability of €1.4 million. A section explains why the methods ask different questions. The hedging section cites Shapiro and Hanouna on not hedging accounting exposure, and the closing section, citing Madura, points to operating exposure.
Reading the FNCE 4103 Week 6 rubric
Translation exposure notes are graded on correct method, accurate restatement and sound judgment. The functional currency must be determined with reasons, because it decides the method. The exhibit should apply the right rate to each account and show where the translation difference goes, in equity or in income. Strong notes compare methods to show why exposure differs, quantify a currency move and explain clearly that translation changes reported figures without moving cash. Recommending against hedging pure accounting exposure, with exceptions such as covenants, shows good judgment. Notes that mix methods, misplace the adjustment or treat translation losses as cash losses fall short. Figures in the exhibit should add up: translated assets must equal translated liabilities and equity once the adjustment is included, and a reader should be able to verify that from the table alone. Labeling each rate as closing, historical or average prevents most errors.
Common FNCE 4103 Week 6 mistakes, and how to avoid them
Start with the subsidiary's facts: which currency it sells in, pays in and borrows in. That tells you its functional currency. Then list its balance sheet and decide which rate applies to each line under the method that follows; closing rates for most items under the current rate method, historical rates for nonmonetary items under the temporal method. Translate, and find the difference that balances the sheet. Apply a 5 percent currency move and see what changes. Finally, ask whether any cash actually moves. Common errors are using the average rate for the balance sheet and putting the adjustment in income. Share the subsidiary figures you have and we can walk through the restatement.
Get a FNCE 4103 Week 6 example written to your instructions
Subsidiary figures are the raw material here, so send them alongside whatever Week 6 prompt and rubric your section posted, plus any rates the assignment pins down. The sample's restatement exhibit is built from those accounts, and the adjustment is located and quantified. The first note is free and reaches you in 24 to 48 hours.
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FNCE 4103 Week 6 questions, answered
Where can I find a free FNCE 4103 Week 6 sample paper?
The translation note and its two-method restatement are posted on this page without charge.
Why is the euro the functional currency in the FNCE 4103 Week 6 note?
The subsidiary sells, pays its costs and borrows in euros and largely finances itself, so its primary economic environment is euro-based.
Where does the translation loss go?
Under the current rate method, to the cumulative translation adjustment in equity, not to net income.
What would a 5 percent euro fall do?
Reduce reported equity by about $325 thousand under the current rate method, or create a $76 thousand gain under the temporal method.
Should the company hedge it?
Generally not, because no cash moves; only if a covenant depends on reported equity or capital is about to be brought home.