Grand Scheme TOPIC 11 TRANSLATION OF FOREIGN FINANCIAL STATEMENTS

Transcription

1 1- Translation of Foreign Financial Statements - Heading 2 TOPIC 11 TRANSLATION OF FOREIGN FINANCIAL STATEMENTS Grand Scheme 3 4 P owns a foreign S S keeps its books using a FC (not US$) How do we convert S s FS numbers into US$ for purposes of constructing the Consolidated FS? 1 st We want S s FS to reflect its functional currency () This is the currency that is most commonly used in the S s operations (functions) May be the S s domestic currency or it may be a different currency 2 nd After making sure S s FS are in its, convert S s FS numbers into US$ 1

2 5- Functional Currency - Heading 6- Functional Currency - #1 FUNCTIONAL CURRENCY P owns foreign S Currency of country where S located is its Domestic Currency S keeps books using DC (not US$) S regulated by foreign country & must use DC for its books When preparing consolidated FS P has to convert S s books into US$ 7- Functional Currency - #2 8- Functional Currency - #3 Functional Currency () is primary currency in which S generates and expends cash In which S functions may be S s DC E.g., US P owns Italian S that manufactures & sells goods in Italy S s Financing from Italian banks Suppliers from Italian Cos Customers in Italy S s may be DC, but doesn t have to be 2

3 9- Functional Currency - #4 10- Functional Currency - #5 may be P s DC (US$) E.g., US P owns Mexican S that manufactures goods for export to US S s Financing from US banks Suppliers US Cos Customers in US US$ can be another currency Not DC of either P or S E.g., US P own Irish S that sells goods to UK S s Financing from UK banks Suppliers UK Cos Customers in UK Not US$ nor Euro 11- Functional Currency - #6 12- Steps of Preparing S s FS for Consolidation - Heading Determination of very subjective Reasonable people can differ Exam will usually tell you which currency is Steps in Preparing Subsidiary s Financial Statements For Consolidation 3

4 13- Steps of Preparing S s FS for Consolidation - #1 When translating foreign S s books into US$ 1 st Step: S s books must reflect US GAAP 2 nd Step: Identify S s If DC is Skip 3 rd Step 3 rd Step: If S s DC isn t its remeasure S s accounts into its If S s = US$ Skip 4 th Step & stop Remeasurement called temporal method or remeasurement method 4 th Step: Translate from S s to US$ Translation called current rate method, functional method or translation method 14- Translation - Heading Translation (Converting Functional Currency to US dollars) 15- Translation - #1 16- Translation - #2 If S s DC is its Translate S s account balances into US$ Include translated account balances in Consolidation WS Translation Rule 1: All S s assets and liabilities are translated at current XRate As of date of translation Date of Consolidated FS 4

5 17- Translation - #3 18- Translation - #4 Translation Rule 2: Use W/A XRates for reporting period to translate rev & exp Translation Rule 3: Use XRate on date of investment in S for S s equity accounts (e.g., common stock) other than RE 19 - Translation - # Translation - #6 RE is translated in layers: RE that existed when P bought S Use XRate on date of investment in S Income additions to RE after P owns S Use above rules to translate income each year Reductions for dividends Use XRates on date of declaration of dividends E.g.: Translation of S s assets Use current XRate at date of translation E.g., 1FC = US$ 1.05 at end of year Same rule for contra assets 5

6 21 - Translation - # Translation - #8 Trial Translation in S s accounts Relevant XRate in US$ Cash 10, $ 10,500 A/R 21, ,050 Bad Debt Allow. -1, ,050 A/R from P 14, ,700 Inventory 30, ,500 Prepaid Insurance 3, ,150 Land 18, ,900 Depreciable Assets 120, ,000 Acc. Depr. -15, ,750 Translation of S s exps Use W/A XRate for period E.g., W/A XRate for year is 1FC = US$ 1.03 Left Side of Trial to be Continued with Expenses 23 - Translation - # Translation - #10 Trial Translation (con t) in S s accounts Relevant XRate in US$ COGS 180, $ 185,400 Depr. Exp. 10, ,300 Inc. Tax Exp. 30, ,900 Other Expenses 23, ,690 Total Debits 443,000 $ 460,290 Translation of S s liabilities Use current XRate at date of translation 6

7 25 - Translation - # Translation - #12 Trial Translation (con t) in S s accounts Relevant XRate in US$ A/P 20, $ 21,000 Taxes Payable 30, ,500 Accrued Interest Payable 1, ,050 Mortgage Payable Land 10, ,500 Translation of S s equity (including purchased RE) Preexisting RE (existing when P bought S) Use XRates when investment made New RE Use XRate for Revenue & Expenses for year earned E.g., Preexisting RE & XRate when P bought S was 1FC = US$ 1.00 Right Side of Trial to be Continued with Equity & Revenue 27 - Translation - # Cumulative Translation Adjustment - Heading Trial Translation (con t) in S s accounts Relevant XRate in US$ Common Stock 80, $ 80,000 Retained Earnings 20, ,000 Cumulative Translation Adjustment 7

8 29- Cumulative Translation Adjustment - #1 30- Cumulative Translation Adjustment - #2 S s accounts translated using various exchange rates Double entry bookkeeping s mechanisms that provide equal and offsetting debits and credits can break down with these arbitrary rules E.g., You can have problems with: Trial balances D entry in WS A entry in WS Trial Translation (con t) in Relevant XRate in US$ Sales - P FC 80, $ 82,400 Sales - Other 200, ,000 Gain on Sale of Depr. Assets 2, ,060 CT Adj. (plug number) 5,780 Total Credits FC443,000 $460, Cumulative Translation Adjustment - #3 32- Cumulative Translation Adjustment - #4 The CT Adjustment Treated as Other Comprehensive Income (OCI) CT Adjustments Held in the equity section of BS No immediate effect on NI (Not on Income Statement) Just kept in equity on Consolidation BS When S Sold (partial or complete) or Liquidated (complete or substantially complete) OCI will be closed to gain/loss on sale/liquidation. Assume that P sell a foreign S & there was OCI. Calculate the gain/loss, then add credit in OCI or subtract debit in OCI Proceeds from sale of S $4,750,000 BV of Inv in S account -4,200,000 $550,000 in CT Adj. (debit) -320,000 Gain on sale of S $230,000 8

9 33- Cumulative Translation Adjustment - #5 34- Cumulative Translation Adjustment - #6 CT Adj is an equity account of S CT Adj that belongs to P needs to be reallocated to P (Controlling Interest) E.g., 90%-owned S has CT Adj. of $5,780 P gets $5,202 ($5,780 x 90%) & NCI gets $578 (10%) Called CT entry: CT D. CT Adj. S $ 5,202 C. CT Adj. - P $ 5,202 S is a foreign asset & any asset created in D entry on WS is a foreign asset Do analysis of purchase price in in FC Assets are translated using current XRate D entry is funded by Inv in S account Inv in S converted to US$ from FC when P bought S Inv in S balance calculated using XRate at time of purchase of S Different XRates could cause lack of symmetry in D entry 35- Cumulative Translation Adjustment - #7 CT Adj. P will be used to balance the D entry D Entry: FC XRate US$ Depr. Assets 15,000 $1.05 $15,750 Debit Investment in S 15, ,000 Credit CT Adj. - P 750 Credit D D. Depreciable Assets $ 15,750 C. Investment in S $ 15,000 CT Adj. - P Cumulative Translation Adjustment - #8 CT Adj is used to balance A entry on WS Asset is foreign asset Amortization of asset is foreign exp Calculate amortization in FC Dr. Amortization Expense FC 1500 Cr. Accumulated Depreciation FC 1500 Then translate Amortization Exp. & Acc. Dep. into US$ Assets (including Acc. Depr. account) are translated at current XRate Depr. Exp. translated using W/A XRate Different XRates could lose symmetry Need to use CT Adj 9

10 37- Cumulative Translation Adjustment - #9 38- Remeasurement - Heading Distribution of Asset FC XRate US$ Acc. Depr & Amort. 1,500 $1.05 $1,575 Credit Depr. & Amort. Exp. 1, ,545 Debit CT Adj. - P 30 Debit Remeasurement A D. Depreciation & Amortization Exp. $ 1,545 CT Adj. - P 30 C. Acc. Depreciable & Amortization $ 1, Remeasurement - #1 40- Remeasurement - #2 Now, discussing when S s is not S s DC S s books are sometimes referred to as books of record (BR) Your book uses this term Currency used in BR (BRC) 1 st remeasure S s accounts from the DC to Use historical rate method 2 nd If is not US$, then Must translate S s accounts from to US$ 10

11 41- Remeasurement - #3 42- Remeasurement - #4 Monetary assets & all liabilities remeasured at current XRate Date of consolidation All other assets remeasured at historical XRate on date that assets were acquired Use historical XRate on date of P s purchase of S if assets existed when P bought S) Monetary assets represent rights to receive money which are: fixed in amount or determinable without reference to future prices of specific goods/services Amount to be received does not change with inflation E.g., A/R 43- Remeasurement - #5 Elements of NI remeasured at W/A XRate for period Except for items that can be specifically identified with date of acquisition E.g.s, COGS comes from inventory Use historical XRate on date inventory, and Depreciation comes from fixed assets use same historical XRate used for asset being depreciated 44- Remeasurement - #6 Equity accounts are remeasured as follows: Equity and RE balances on date of investment are remeasured at historical XRate on date P bought S NI additions to RE are included at same XRate that was used to remeasure them as income Dividend deductions to RE are remeasured at the historical XRates at date of declaration 11

12 45- Remeasurement - #7 46- Remeasurement - #8 Special rule for using LCM rule on Inventory First remeasure Inventory to S s Then apply LCM rule (compare market & cost) Comparison may be different than in comparison governs Just like translation, trial balance loses balance after remeasurement May need to introduce a gain/loss in trial balance after remeasurement Called Remeasurement Gain/Loss recognized as a component of income On IS Not OCI (like CT Adj.) On BS 47- Remeasurement, E.g. - #1 48- Remeasurement, E.g. - #2 First, do Monetary Assets. is US$ Use Current Rate 1DC = US$1.05 Trial Remeasurement Relevant XRate in (US$) Cash DC 10,000 $1.05 $10,500 A/R 21, ,050 Bad Debt Allow. -1, ,050 Due From P 14, ,700 Inventory using DC: Historical Cost: DC 32,000 Current Value: DC 30,000 Need to do comparison in (US$): XRates for remeasuring historical cost of inventory: Inventory bought when: 1DC = US$ (DC 10,000), & 1DC = US$ (DC 22,000) Use Current XRate for remeasuring FMV (Market) into Trial will continue for Non-Monetary Assets 12

13 49- Remeasurement, E.g. - #3 50- Remeasurement, E.g. - #4 For Non-Monetary Assets, use Historical XRates. Inventory also used LCM rule DC x XRate U.S$ Historical Cost: 10,000 x $10,450 22,000 x ,946 Total Cost: $33,396 Trial Remeasurement (con t) in (US$) Inv. (See Prior Slide) DC 30,000 $1.05 $31,500 Prepaid Insurance 3, ,135 Land 18, ,270 FMV: DC 30,000 x 1.05 $31, Remeasurement, E.g. - #5 52- Remeasurement, E.g. - #6 As noted above, with respect to the Depreciable Assets we use Historical XRate at time of acquisition: in (US$) January 1, 2000 acquisition DC 80,000 $1.00 $80,000 July 1, 2001 acquisition 60, ,400 DC140,000 $142,400 For Depr. Exp., use Historical XRates: January 1, 2000 acquisition (80,000 DC / 10) July 1, 2001 acquisition (60,000 DC / 10 x ½ year) in DC 8,000 $1.00 $8,000 3, ,120 DC 11,000 $11,120 Disposed of Asset will be depreciated (here), but will not be in Acc. Depre. Asset was acquired in 2000 but sold on July 1,

14 53- Remeasurement, E.g. - #7 54- Remeasurement, E.g. - #8 For Acc. Depr., use Historical XRates: Calculate COGS Using Historical XRates: (US$) January 1, 2000 acq. (80,000 DC / 10 x 2 years) DC 16,000 $1.00 $16,000 July 1, 2001 acq. (60,000 DC / 10 x ½ year) 3, ,120 DC 19,000 $19,120 Inventory Sold: (US$) December 1, 2001 DC 20,000 $1.00 $20,000 acquisition March 1, 2001 acquisition 60, ,900 July 1, 2001 acquisition 80, ,200 October 1, 2001 acquisition 20, ,900 DC180,000 $185,000 You do not included Disposed Asset (NO LONGER ON BS). 55- Remeasurement, E.g. - #9 56- Remeasurement, E.g. - #10 Use these figures in Trial Remeasurement: Trial Remeasurement (con t) in (US$) Depreciable Assets DC 140,000 (See prior slides) $142,400 Acc. Depreciation -19,000 (See prior slides) -19,120 in (US$) Ins. Exp. DC 3,000 $1.045 $3,145 of Other Exp (W/A) 20, ,600 DC 23,000 $23,745 Cost of Goods Sold 180,000 (See prior slides) 185,000 Depreciation Expense 10,000 (See prior slides) 10,120 14

15 57- Remeasurement, E.g. - # Remeasurement, E.g. - #12 Use this figure for Other Expenses in Trial Remeasurement: Now, do credit side of Trial Remeasurement Remember that we use Current XRate for liabilities: Trial Remeasurement (con t) in (US$) Income Tax Exp. DC 30,000 $1.03 $30,900 Other Expenses 23,000 (See Prior Slide) 23,735 Total Debits DC 443,000 $456,140 Trial Remeasurement (con t) in A/P DC 20,000 $1.05 $21,000 Taxes Payable 30, ,500 Accrd. Int. Pay. 1, ,050 Mortgage Payable 10, , Remeasurement, E.g. - # Remeasurement, E.g. - #14 Remember that equity and RE balances on date of investment are translated at Historical XRate on date P bought S Income additions to RE are included at same XRate that the income was remeasured when it was recognized Assume RE existed when P bought S in (US$) Common Stock DC 80,000 $1.0 $80,000 RE 20, ,000 15

16 61- Remeasurement, E.g. - # Remeasurement, E.g. - #16 Rev is generally remeasured using W/A XRate Gain on sale of assets are remeasured using Historical XRate at time of purchase of asset Assume Sales Price is given in US$ Relevant XRate in (US$) Selling Price DC 19, $1.02 $19,760 Cost DC 20,000 Less: Acc. Depr. -3,000 Book Value DC 17, $ ,000 Gain $2, Remeasurement, E.g. - # Remeasurement, E.g. - #18 We add a Remeasurement Gain to get credits = debits: in (US$) Sales - P DC 80,000 $1.03 $82,400 Sales - Other 200, ,000 Gain on Sale Depr. Assets 2,000 (See Above ) 2,760 Remeasurement Gain 930 Total Credits DC 443,000 $456,140 Remeasurement & Translation Now, S s isn t DC or US$ E.g., a US P & Irish S S keeps it books using S s functions (e.g., sales/purchases) are in 16

17 65- Remeasurement, E.g. - #19 Because DC is not, Remeasure accounts into Because is not US$, Translate into US$ 17