In preparing their financial statements, U.S. firms with...

In preparing their financial statements, U.S. firms with sales in foreign currencies have to engage in "foreign currency translations"; that is, they have to convert foreign currency values into U.S. dollars. In its 2014 Annual Report, IBM made the following statement: "As with all companies with a similar global business profile, with the dollar strengthening, the company also expects that currency will have a significant translation impact on its profit growth." a. What does the report mean by "the dollar strengthening"? b. As a U.S.-based company, doesn't IBM benefit when the U.S. dollar is stronger? Briefly explain.

In preparing their financial statements, U.S. firms with sales in foreign currencies have to engage in "foreign currency translations"; that is, they have to convert foreign currency values into U.S. dollars. In its 2014 Annual Report, IBM made the following statement: "As with all companies with a similar global business profile, with the dollar strengthening, the company also expects that currency will have a significant translation impact on its profit growth."
a. What does the report mean by "the dollar strengthening"?
b. As a U.S.-based company, doesn't IBM benefit when the U.S. dollar is stronger? Briefly explain.

Labs

Want to see this concept in action?

NEW

Explore this concept interactively to see how it behaves as you change inputs.

View Labs

Key Concepts

Foreign Currency Translation

This concept involves the process of converting the financial statements of foreign subsidiaries from their local currency into the parent company’s reporting currency. It is a critical aspect of multinational financial reporting and ensures that all financial results are expressed in a consistent unit, allowing stakeholders to compare and consolidate the figures appropriately.

Exchange Rate Movements

This refers to the fluctuations in the value of one currency relative to another over time. When the report mentions 'the dollar strengthening', it implies that the U.S. dollar is appreciating relative to other foreign currencies, meaning it can buy more of the foreign currencies than before.

Translation Impact on Profit

This key concept explains how exchange rate fluctuations can affect the reported profits of a multinational company. Although companies like IBM are based in the U.S. and might seem to benefit from a strong dollar in some ways, the translation of foreign revenues and expenses at less favorable exchange rates can reduce overall profit figures once converted to U.S. dollars.

Please give Ace some feedback