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CHAPTER10MANAGEMENTOFTRANSLATIONEXPOSURE

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMS

QUESTIONS

1.Explainthedifferenceinthetranslationprocessbetweenthemonetary/nonmonetarymethodandthetemporalmethod.

Answer:Underthemonetary/nonmonetarymethod,allmonetarybalancesheetaccountsofaforeignsubsidiaryaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsaretranslatedatthehistoricalrateexchangerateineffectwhentheaccountwasfirstrecorded.Underthetemporalmethod,monetaryaccountsaretranslatedatthecurrentexchangerate.Otherbalancesheetaccountsarealsotranslatedatthecurrentrate,iftheyarecarriedonthebooksatcurrentvalue.Iftheyarecarriedathistoricalvalue,theyaretranslatedattherateineffectonthedatetheitemwasputonthebooks.Sincefixedassetsandinventoryareusuallycarriedathistoricalcosts,thetemporalmethodandthemonetary/nonmonetarymethodwilltypicallyprovidethesametranslation.

2.Howaretranslationgainsandlosseshandleddifferentlyaccordingtothecurrentratemethodincomparisontotheotherthreemethods,thatis,thecurrent/noncurrentmethod,themonetary/nonmonetarymethod,andthetemporalmethod?

Answer:Underthecurrentratemethod,translationgainsandlossesarehandledonlyasanadjustmenttonetworththroughanequityaccountnamedthe“cumulativetranslationadjustment”account.Nothingpassesthroughtheincomestatement.Theotherthreetranslationmethodspassforeignexchangegainsorlossesthroughtheincomestatementbeforetheyenterontothebalancesheetthroughtheaccumulatedretainedearningsaccount.

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3.IdentifysomeinstancesunderFASB52whenaforeignentity’sfunctionalcurrencywouldbethesameastheparentfirm’scurrency.

Answer:ThreeexamplesunderFASB52,wheretheforeignentity’sfunctionalcurrencywillbethesameastheparentfirm’scurrency,are:i)theforeignentity’scashflowsdirectlyaffecttheparent’scashflowsandarereadilyavailableforremittancetotheparentfirm;ii)thesalespricesfortheforeignentity’sproductsareresponsiveonashort-termbasistoexchangeratechanges,wheresalespricesaredeterminedthroughworldwidecompetition;and,iii)thesalesmarketisprimarilylocatedintheparent’scountryorsalescontractsaredenominatedintheparent’scurrency.

4.DescribetheremeasurementandtranslationprocessunderFASB52ofawhollyownedaffiliatethatkeepsitsbooksinthelocalcurrencyofthecountryinwhichitoperates,whichisdifferentthanitsfunctionalcurrency.

Answer:Foraforeignentitythatkeepsitsbooksinitslocalcurrency,whichisdifferentfromitsfunctionalcurrency,thetranslationprocessaccordingtoFASB52isto:first,remeasurethefinancialreportsfromthelocalcurrencyintothefunctionalcurrencyusingthetemporalmethodoftranslation,andsecond,translatefromthefunctionalcurrencyintothereportingcurrencyusingthecurrentratemethodoftranslation.

5.Itis,generally,notpossibletocompletelyeliminatebothtranslationexposureandtransactionexposure.Insomecases,theeliminationofoneexposurewillalsoeliminatetheother.Butinothercases,theeliminationofoneexposureactuallycreatestheother.Discusswhichexposuremightbeviewedasthemostimportanttoeffectivelymanage,ifaconflictbetweencontrollingbotharises.Also,discussandcritiquethecommonmethodsforcontrollingtranslationexposure.

Answer:Sinceitis,generally,notpossibletocompletelyeliminatebothtransactionandtranslationexposure,werecommendthattransactionexposurebegivenfirstprioritysinceitinvolvesrealcashflows.Thetranslationprocess,on-the-otherhand,hasnodirecteffectonreportingcurrencycashflows,andwillonly

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havearealizableeffectonnetinvestmentuponthesaleorliquidationoftheassets.

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Therearetwocommonmethodsforcontrollingtranslationexposure:abalancesheethedgeandaderivativeshedge.Thebalancesheethedgeinvolvesequatingtheamountofexposedassetsinanexposurecurrencywiththeexposedliabilitiesinthatcurrency,sothenetexposureiszero.Thuswhenanexposurecurrencyexchangeratechangesversusthereportingcurrency,thechangeinassetswilloffsetthechangeinliabilities.Tocreateabalancesheethedge,oncetransactionexposurehasbeencontrolled,oftenmeanscreatingnewtransactionexposure.Thisisnotwisesincerealcashflowlossescanresult.Aderivativeshedgeisnotreallyahedge,butratheraspeculativeposition,sincethesizeofthe“hedge”isbasedonthefutureexpectedspotrateofexchangefortheexposurecurrencywiththereportingcurrency.Iftheactualspotratediffersfromtheexpectedrate,the“hedge”mayresultinthelossofrealcashflows.

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PROBLEMS

1.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructatranslationexposurereportforCentraliaCorporationanditsaffiliatesthatisthecounterparttoExhibit10.7inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.

Solution:ThefollowingtableprovidesatranslationexposurereportforCentraliaCorporationanditsaffiliatesunderFASB8,whichisessentiallythetemporalmethodoftranslation.ThedifferencebetweenthenewreportandExhibit10.7isthatnonmonetaryaccountssuchasinventoryandfixedassetsaretranslatedatthehistoricalexchangerateiftheyarecarriedathistoricalcosts.Thus,theseaccountswillnotchangevalueswhenexchangerateschangeandtheydonotcreatetranslationexposure.

ExaminationofthetableindicatesthatunderFASB8thereisnegativenetexposurefortheMexicanpesoandtheeuro,whereasunderFASB52thenetexposureforthesecurrenciesispositive.ThereisnochangeinnetexposurefortheCanadiandollarandtheSwissfranc.Consequently,iftheeurodepreciatesagainstthedollarfrom€1.1000/$1.00to€1.1786/$1.00,asthetextexampleassumed,exposedassetswillnowfallinvaluebyasmalleramountthanexposedliabilities,insteadofviceversa.Theassociatedreportingcurrencyimbalancewillbe$239,415,calculatedasfollows:

ReportingCurrencyImbalance=

-e3,949,0000-e3,949,0000

-

e1.1786/$1.00e1.1000/$1.00

=$239,415.

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TranslationExposureReportunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,

December31,2005(in000CurrencyUnits)

Canadian

Mexican

Swiss

Dollar

Peso

Euro

Franc

Assets

Cash

Accountsreceivable

Inventory

Netfixedassets

Exposedassets

Liabilities

Accountspayable

Notespayable

Long-termdebt

Exposedliabilities

Netexposure

CD200

0

0

0

CD200

CD0

0

0

CD0

CD200

Ps6,000

9,000

0

0

Ps15,000

Ps7,000

17,000

27,000

Ps51,000

(Ps36,000)

€825

1,045

0

0

€1,870

€1,364

935

3,520

€5,819

(€3,949)

0

SF

0

0

0

SF0

SF0

1,400

0

SF1,400

(SF1,400)

2.AssumethatFASB8isstillineffectinsteadofFASB52.ConstructaconsolidatedbalancesheetforCentraliaCorporationanditsaffiliatesafteradepreciationoftheeurofrom€1.1000/$1.00to€1.1786/$1.00thatisthecounterparttoExhibit10.8inthetext.Centraliaanditsaffiliatescarryinventoryandfixedassetsonthebooksathistoricalvalues.

Solution:ThisproblemisthesequeltoProblem1.ThesolutiontoProblem1showedthatiftheeurodepreciatedtherewouldbeareportingcurrencyimbalanceof$239,415.UnderFASB8thisiscarriedthroughtheincomestatementasaforeignexchangegaintotheretainedearningsonthebalancesheet.The

followingtableshowsthatconsolidatedretainedearningsincreasedto$4,190,000from$3,950,000inExhibit

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10.8.Thisisanincreaseof$240,000,whichisthesameasthereportingcurrencyimbalanceafteraccountingforroundingerror.

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ConsolidatedBalanceSheetunderFASB8forCentraliaCorporationanditsMexicanandSpanishAffiliates,December31,2005:Post-ExchangeRateChange(in000Dollars)

Assets

Cash

Accountsreceivable

Inventory

InvestmentinMexicanaffiliate

InvestmentinSpanishaffiliate

Netfixedassets

Totalassets

LiabilitiesandNetWorth

Accountspayable

Notespayable

Long-termdebt

Commonstock

Retainedearnings

Totalliabilitiesandnetworth

CentraliaCorp.

(parent)

$950a

1,450b

3,000

-c

-d

9,000

$1,800

2,200

7,110

3,500

4,190

Mexican

Affiliate

$600

900

1,500

-

-

4,600

$700b

1,700

2,700

-c

-c

Spanish

Affiliate

$700

887

1,500

-

-

4,000

$1,157

1,043e

2,987

-d

-d

Consolidated

BalanceSheet

$2,250

3,237

6,000

-

-

17,600

$29,087

$3,657

4,943

12,797

3,500

4,190

$29,087

aThisincludesCD200,000theparentfirmhasinaCanadianbank,carriedas$150,000.

CD200,000/(CD1.3333/$1.00)=$150,000.

b$1,750,000-$300,000(=Ps3,000,000/(Ps10.00/$1.00))intracompanyloan=$1,450,000.

c,dInvestmentinaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation.

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eTheSpanishaffiliateowesaSwissbankSF375,000(÷

books,

aftertheexchangeratechange,aspart

€1,229,649/(€1.1786/$1.00)=$1,043,313.

SF1.2727/€1.00=€294,649).Thisiscarriedonthe

of€1,229,649=€294,649+€935,000.

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3.InExample10.2,aforwardcontractwasusedtoestablishaderivatives“hedge”toprotectCentraliafromatranslationlossiftheeurodepreciatedfrom€1.1000/$1.00to€1.1786/$1.00.Assumethatanover-the-counterputoptionontheeurowithastrikepriceof€1.1393/$1.00(or$0.8777/€1.00)canbepurchasedfor$0.0088pereuro.Showhowthepotentialtranslationlosscanbe“hedged”withanoptioncontract.

Solution:Asinexample10.2,ifthepotentialtranslationlossis$110,704,theequivalentamountinfunctionalcurrencythatneedstobehedgedis€3,782,468.Ifinfacttheeurodoesdepreciateto€1.1786/$1.00($0.8485/€1.00),€3,782,468canbepurchasedinthespotmarketfor$3,209,289.Atastrikingpriceof€1.1393/$1.00,the€3,782,468canbesoldthroughtheputfor$3,319,993,yieldingagrossprofitof$110,704.Theputoptioncost$33,286(=€3,782,468x$0.0088).Thus,atanexchangerateof€1.1786/$1.00,theputoptionwilleffectivelyhedge$110,704-$33,286=$77,418ofthepotentialtranslationloss.Atterminalexchangeratesof€1.1393/$1.00to€1.1786/$1.00,theputoptionhedgewillbelesseffective.Anoptioncontractdoesnothavetobeexercisedifdoingsoisdisadvantageoustotheoptionowner.Therefore,theputwillnotbeexercisedatexchangeratesoflessthan€1.1393/$1.00(morethan$0.8777/€1.00),inwhichcasethe“hedge”willlosethe$33,286costoftheoption.

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MINICASE:SUNDANCESPORTINGGOODS,INC.SundanceSportingGoods,Inc.,isaU.S.manufacturerofhigh-qualitysportinggoods--principallygolf,tennisandotherracquetequipment,andalsolawnsports,suchascroquetandbadminton--withadministrativeofficesandmanufacturingfacilitiesinChicago,Illinois.Sundancehastwowhollyownedmanufacturingaffiliates,oneinMexicoandtheotherinCanada.TheMexicanaffiliateislocatedinMexicoCityandservicesallofLatinAmerica.TheCanadianaffiliateisinTorontoandservesonlyCanada.Eachaffiliatekeepsits

booksinitslocalcurrency,whichisalsothefunctionalcurrencyfortheaffiliate.Thecurrentexchangerates

are:$1.00=CD1.25=Ps3.30=A1.00=￥105=W800.ThenonconsolidatedbalancesheetsforSundanceanditstwoaffiliatesappearintheaccompanyingtable.

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NonconsolidatedBalanceSheetforSundanceSportingGoods,Inc.andItsMexicanandCanadianAffiliates,December31,2005(in000CurrencyUnits)

Assets

Cash

Accountsreceivable

Inventory

InvestmentinMexicanaffiliate

InvestmentinCanadianaffiliate

Netfixedassets

Totalassets

LiabilitiesandNetWorth

Accountspayable

Notespayable

Long-termdebt

Commonstock

Retainedearnings

Totalliabilitiesandnetworth

Sundance,Inc.

(parent)

$1,500

2,500a

5,000

2,400b

3,600c

12,000

$27,000

$3,000

4,000d

9,000

5,000

6,000

$27,000

Mexican

Affiliate

Ps1,420

2,800e

6,200

-

-

11,200

Ps21,620

Ps2,500a

4,200

7,000

4,500b

3,420b

Ps21,620

Canadian

Affiliate

CD1,200

1,500f

2,500

-

-

5,600

CD10,800

CD1,700

2,300

2,300

2,900c

1,600c

CD10,800

aTheparentfirmisowedPs1,320,000bytheMexicanaffiliate.Thissumisincludedintheparent’saccountsreceivableas$400,000,translatedatPs3.30/$1.00.Theremainderoftheparent’s(Mexicanaffiliate’s)accountsreceivable(payable)isdenominatedindollars(pesos).

bTheMexicanaffiliateiswhollyownedbytheparentfirm.Itiscarriedontheparentfirm’sbooksat$2,400,000.Thisrepresentsthesumofthecommonstock(Ps4,500,000)andretainedearnings(Ps3,420,000)ontheMexicanaffiliate’sbooks,translatedatPs3.30/$1.00.

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cTheCanadianaffiliateiswhollyownedbytheparentfirm.Itiscarriedontheparentfirm’sbooksat$3,600,000.Thisrepresentsthesumofthecommonstock(CD2,900,000)andtheretainedearnings(CD1,600,000)ontheCanadianaffiliate’sbooks,translatedatCD1.25/$1.00.

dTheparentfirmhasoutstandingnotespayableof￥126,000,000dueaJapanesebank.Thissumiscarriedontheparentfirm’sbooksas$1,200,000,translatedat￥105/$1.00.OthernotespayablearedenominatedinU.S.dollars.

eTheMexicanaffiliatehassoldonaccountA120,000ofmerchandisetoanArgentineimporthouse.ThissumiscarriedontheMexicanaffiliate’sbooksasPs396,000,translatedatA1.00/Ps3.30.OtheraccountsreceivablearedenominatedinMexicanpesos.

fTheCanadianaffiliatehassoldonaccountW192,000,000ofmerchandisetoaKoreanimporter.ThissumiscarriedontheCanadianaffiliate’sbooksasCD300,000,translatedatW800/CD1.25.OtheraccountsreceivablearedenominatedinCanadiandollars.

YoujoinedtheInternationalTreasurydivisionofSundancesixmonthsagoafterspendingthelasttwoyearsreceivingyourMBAdegree.ThecorporatetreasurerhasaskedyoutoprepareareportanalyzingallaspectsofthetranslationexposurefacedbySundanceasaMNC.Shehasalsoaskedyoutoaddressinyouranalysistherelationshipbetweenthefirm’stranslationexposureanditstransactionexposure.Afterperformingaforecastoffuturespotratesofexchange,youdecidethatyoumustdothefollowingbeforeanysensiblereportcanbewritten.

a.UsingthecurrentexchangeratesandthenonconsolidatedbalancesheetsforSundanceanditsaffiliates,prepareaconsolidatedbalancesheetfortheMNCaccordingtoFASB52.

b.i.PrepareatranslationexposurereportforSundanceSportingGoods,Inc.,anditstwoaffiliates.

ii.Usingthetranslationexposurereportyouhaveprepared,determineifanyreportingcurrencyimbalance

willresultfromachangeinexchangeratestowhichthefirmhascurrencyexposure.Yourforecastisthatexchangerateswillchangefrom$1.00=CD1.25=Ps3.30=A1.00=￥105=W800to$1.00=CD1.30=Ps3.30=A1.03=￥105=W800.

c.PrepareasecondconsolidatedbalancesheetfortheMNCusingtheexchangeratesyouexpectinthefuture.DeterminehowanyreportingcurrencyimbalancewillaffectthenewconsolidatedbalancesheetfortheMNC.

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d.i.PrepareatransactionexposurereportforSundanceanditsaffiliates.Determineifanytransactionexposuresarealsotranslationexposures.

ii.InvestigatewhatSundanceanditsaffiliatescandotocontrolitstransactionandtranslationexposures.Determineifanyofthetranslationexposureshouldbehedged.

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SuggestedSolutiontoSundanceSportingGoods,Inc.

NotetoInstructor:Itisnotnecessarytoassigntheentirecaseproblem.Partsa.andb.i.canbeusedasself-containedproblems,respectively,onbasicbalancesheetconsolidationandthepreparationofatranslationexposurereport.

a.BelowistheconsolidatedbalancesheetfortheMNCpreparedaccordingtothecurrentratemethodprescribedbyFASB52.Notethatthebalancesheetbalances.Thatis,TotalAssetsandTotalLiabilitiesandNetWorthequaloneanother.Thus,theassumptionisthatthecurrentexchangeratesarethesameaswhentheaffiliateswereestablished.Thisassumptionisrelaxedinpartc.

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ConsolidatedBalanceSheetforSundanceSportingGoods,Inc.itsMexicanandCanadianAffiliates,December31,2005:Pre-ExchangeRateChange(in000Dollars)

Sundance,Inc.

(parent)

Mexican

Affiliate

Canadian

Affiliate

Consolidated

BalanceSheet

Assets

Cash

Accountsreceivable

Inventory

in

Mexican

Investment

affiliate

in

Canadian

Investment

affiliate

Netfixedassets

Totalassets

LiabilitiesandNetWorth

Accountspayable

Notespayable

Long-termdebt

Commonstock

Retainedearnings

Totalliabilitiesandnet

worth

$1,500

2,100a

5,000

-b

-c

12,000

$3,000

4,000d

9,000

5,000

6,000

$430

849e

1,879

-

-

3,394

$358a

1,273

2,121

-b

-b

$960

1,200f

2,000

-

-

4,480

$1,360

1,840

1,840

-c

-c

$2,890

4,149

8,879

-

-

19,874

$35,792

$4,718

7,113

12,961

5,000

6,000

$35,792

a$2,500,000-$400,000(=Ps1,320,000/(Ps3.30/$1.00))intracompanyloan=$2,100,000.

b,cTheinvestmentintheaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation.

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dTheparentowesaJapanesebank￥126,000,000.Thisiscarriedonthebooksas$1,200,000

(=￥126,000,000/(￥105/$1.00)).

eTheMexicanaffiliatehassoldonaccountA120,000ofmerchandisetoanArgentineimporthouse.ThisiscarriedontheMexicanaffiliate’sbooksasPs396,000(=A120,000xPs3.30/A1.00).

fTheCanadianaffiliatehassoldonaccountW192,000,000ofmerchandisetoaKoreanimporter.ThisiscarriedontheCanadianaffiliate’sbooksasCD300,000(=W192,000,000/(W800/CD1.25)).

b.i.BelowispresentedthetranslationexposurereportfortheSundanceMNC.Note,fromthereportthatthereisnetpositiveexposureintheMexicanpeso,Canadiandollar,ArgentineaustralandKoreanwon.Ifanyoftheseexposurecurrenciesappreciates(depreciates)againsttheU.S.dollar,exposedassetsdenominatedinthesecurrencieswillincrease(fall)intranslatedvaluebyagreateramountthantheexposedliabilitiesdenominatedinthesecurrencies.ThereisnegativenetexposureintheJapaneseyen.Iftheyenappreciates(depreciates)againsttheU.S.dollar,exposedassetsdenominatedintheyenwillincrease(fall)intranslatedvaluebysmalleramountthantheexposedliabilitiesdenominatedintheyen.

TranslationExposureReportforSundanceSportingGoods,Inc.anditsMexicanandCanadianAffiliates,December31,2005(in000CurrencyUnits)

ArgentineKorean

AustralWon

W0

192,000

0

0

W192,000

Assets

Cash

Accountsreceivable

Inventory

Fixedassets

Exposedassets

Liabilities

Canadian

Dollar

CD1,200

1,200

2,500

5,600

CD10,500

Mexican

Peso

Ps1,420

2,404

6,200

11,200

Ps21,224

JapaneseYen

￥

0

0

￥

0

0

0

A120

A0

120

0

0

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Accountspayable

Notespayable

Long-termdebt

Exposedliabilities

Netexposure

￥0

126,000

￥0

￥126,000

(￥126,000)

W0

0

0

W0

W192,000

CD1,700

2,300

2,300

CD6,300

CD4,200

Ps1,180

4,200

7,000

Ps12,380

Ps8,844

A0

0

0

A0

A120

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b.ii.TheproblemassumesthatCanadiandollardepreciatesfromCD1.25/$1.00toCD1.30/$1.00andthattheArgentineaustraldepreciatesfromA1.00/$1.00toA1.03/$1.00.Todeterminethereportingcurrency

imbalanceintranslatedvaluecausedbytheseexchangeratechanges,wecanusethefollowingformula:

NetExposureCurrencyiNetExposureCurrencyi

-

S(i/reporting)

=ReportingCurrencyImbalance.

new

old

S(i/reporting)

FromthetranslationexposurereportwecandeterminethatthedepreciationintheCanadiandollarwill

causea

CD4,200,000CD4,200,000

CD1.30/$1.00CD1.25/$1.00

-

=-$129,231

reportingcurrencyimbalance.

Similarly,thedepreciationintheArgentineaustralwillcausea

A120,000A120,000

A1.03/$1.00A1.00/$1.00

-

=-$3,495

reportingcurrencyimbalance.

Intotal,thedepreciationoftheCanadiandollarandtheArgentineaustralwillcauseareportingcurrencyimbalanceintranslatedvalueequalto-$129,231-$3,495=-$132,726.

c.ThenewconsolidatedbalancesheetforSundanceMNCafterthedepreciationoftheCanadiandollarandtheArgentineaustralispresentedbelow.Notethatinorderforthenewconsolidatedbalancesheettobalanceaftertheexchangeratechange,itisnecessarytohaveacumulativetranslationadjustmentaccountbalanceof-$133thousand,whichistheamountofthereportingcurrencyimbalancedeterminedinpartb.ii

(roundedtothenearestthousand).

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ConsolidatedBalanceSheetforSundanceSportingGoods,Inc.itsMexicanandCanadianAffiliates,December31,2005:Post-ExchangeRateChange(in000Dollars)

Assets

Cash

Accountsreceivable

Inventory

InvestmentinMexican

affiliate

InvestmentinCanadian

affiliate

Netfixedassets

Totalassets

LiabilitiesandNetWorth

Accountspayable

Notespayable

Long-termdebt

Commonstock

Retainedearnings

CTA

Totalliabilitiesandnet

worth

Sundance,Inc.(parent)

$1,500

2,100a

5,000

-b

-c

12,000

$3,000

4,000d

9,000

5,000

6,000

-

Mexican

Affiliate

$430

845e

1,879

-

-

3,394

$358a

1,273

2,121

-b

-b

-

Canadian

Affiliate

$923

1,163f

1,923

-

-

4,308

$1,308

1,769

1,769

-c

-c

-

Consolidated

BalanceSheet

$2,853

4,108

8,802

-

-

19,702

$35,465

$4,666

7,042

12,890

5,000

6,000

(133)

$35,465

a$2,500,000-$400,000(=Ps1,320,000/(Ps3.30/$1.00))intracompanyloan=$2,100,000.

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b,cTheinvestmentintheaffiliatescancelswiththenetworthoftheaffiliatesintheconsolidation.

dTheparentowesaJapanesebank￥126,000,000.Thisiscarriedonthebooksas$1,200,000

(=￥126,000,000/(￥105/$1.00)).

eTheMexicanaffiliatehassoldonaccountA120,000ofmerchandisetoanArgentineimporthouse.ThisiscarriedontheMexicanaffiliate’sbooksasPs384,466(=A120,000xPs3.30/A1.03).

fTheCanadianaffiliatehassoldonaccountW192,000,000ofmerchandisetoaKoreanimporter.ThisiscarriedontheCanadianaffiliate’sbooksasCD312,000(=W192,000,000/(W800/CD1.30)).

d.i.ThetransactionexposurereportforSundance,Inc.anditstwoaffiliatesispresentedbelow.ThereportindicatesthatthePs1,320,000accountsreceivableduefromtheMexicanaffiliateisnotalsoatranslationexposurebecausethisisnettedoutintheconsolidation.However,the￥126,000,000notespayableoftheparentisalsoatranslationexposure.Additionally,theA120,000accountsreceivableoftheMexicanaffiliateandtheW192,000,000accountsreceivableoftheCanadianaffiliatearebothtranslationexposures.

TransactionExposureReportforSundanceSportingGoods,Inc.and

itsMexicanandCanadianAffiliates,December31,2005

Account

Accounts

Receivable

NotesPayable

Accounts

Receivable

Amount

Ps1,320,000

￥126,000,000

A120,000

Translation

Exposure

No

Yes

Yes

Affiliate

Parent

Parent

Mexican

.

Canadian

W192,000,000

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Accounts

Receivable

Yes

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d.ii.Sincetransactionexposuremaypotentiallyresultinrealcashflowlosseswhiletranslationexposuredoesnothaveanimmediatedirecteffectonoperatingcashf