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ADVANCED FINANCIALACCOUNTING
12 Consolidating a Foreign Subsidiary
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CONSOLIDATING A FOREIGN SUBSIDIARYISSUES

• Consolidating a foreign subsidiarys financial
  statements is a two step process
• 1. convert the foreign subsidiarys financial
  statements into US GAAP,
• 2. convert the foreign subsidiarys currency
  into .

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CONVERTING FOREIGN CURRENCY INTO

• Say we have a subsidiary in France the issue is
  what is the appropriate exchange rate to use to
  covert its Euro financial statements into .
• Of course, FASB said this is a complicated
  question, so we need to come up with a
  complicated solution hence the invention of
  functional currency.

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FUNCTIONAL CURRENCY

• FAS 52 says this how one converts the
  subsidiarys financials into depends on what
  the subsidiarys functional currency is (and
  whether the subsidiary is in a country with a
  high inflation rate).
• Three currencies of interest in this process
• reporting currency the currency the parent
  uses in its financial statements ().
• local currency the currency the subsidiary
  uses in its financial statements.
• functional currency the currency of the
  primary economic environment in which the
  sub. operates.

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FUNCTIONAL CURRENCYEXAMPLE

• US. Multinational
• R.C. US
• has subs. in
• FRANCE MEXICO INDONESIA VENEZUELA
• L.C. Peso Rupiah
  Bolivar
• Europe Europe Parent Parent Japan
  Japan Venez. Venez.
• Functional
• Currency
• local currency reporting currency 3rd
  country currency looks like local, but
• Current Rate Temporal Method Temporal
  Rupiah to Temporal Method
• Current to R.C.
• Translate Remeasure Remeasure Translate
  Remeasure

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TRANSLATE VS. REMEASURE

• Translation uses the current rate method
• B/S assets and liabilities use the spot
  (current) rate on the B/S date
• -owners equity use the historic rates
• I/S use the average rate

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TRANSLATE VS. REMEASURE

• Remeasurement uses the temporal method
• B/S depends on valuation method used
• accounts shown at present value or
  fair valueuse the spot (current) rate
  accounts shown at historic cost use the
  historic rate
• I/S depends on B/S valuation method
• rev/exp related to assets shown at historic
  cost, use historic rate
• otherwise use the average rate

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FUNCTIONAL CURRENCY

• A subsidiaries functional currency is
  objectively determined by looking at
• cash flows do they affect the parents cash
  flows?
• sales prices determined by whom?
• sales markets in parents country and/or
  denominated in parents currency?
• expenses what country do production components
  come from?
• financing obtained where?
• intercompany transactions lots of transactions
  with the parent?

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QUESTIONS ABOUT FOREIGN SUBSIDIARIES

• ?

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