1 / 41

Multinational Accounting: Translation of Foreign Entity Statements

Baker / Lembke / King. Multinational Accounting: Translation of Foreign Entity Statements. 12. Electronic Presentation by Douglas Cloud Pepperdine University. Differences in Accounting Principles. Four major models of accounting.

adrian-carter
Download Presentation

Multinational Accounting: Translation of Foreign Entity Statements

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Baker / Lembke / King Multinational Accounting: Translation of Foreign Entity Statements 12 Electronic Presentation by Douglas Cloud Pepperdine University

  2. Differences in Accounting Principles Four major models of accounting The U.S. model, which focuses on the information needs of the common stockholder through the application of generally accepted accounting principles.

  3. Differences in Accounting Principles Four major models of accounting The British model, which focuses on the information needs of bondholders, creditors, and preferred stockholders.

  4. Differences in Accounting Principles Four major models of accounting The French-Italian-Spanish model, which is based on the information needs of the taxing authorities.

  5. Differences in Accounting Principles Four major models of accounting The German and Scandinavian countries model, which is extremely conservative and uses large number of reserves to reduce income to its lowest level possible.

  6. Determining the Functional Currency FASB 52 provides specific guidelines for translating foreign currency financial statements.

  7. Determining the Functional Currency What is functional currency? FASB 52 defines it as the currency of the primary economic environment in which the entity operates. Normally, that is the currency of the environment in which an entity primarily generates and expends cash.

  8. Translation Versus Remeasurement Translation is the most common method used and is applied when the local currency is the foreign entity’s functional currency. Remeasurement is the restatement of the foreign entity’s financial statements from the local currency used by the entity into the foreign entity’s functional currency.

  9. Translating Foreign Entity’s Trial Balance Income statement accounts: - Revenue and expenses Generally, weighted average exchange rate for the period covered by the statement Balance sheet accounts: - Assets and liabilities - Stockholders’ equity Current exchange rate on balance sheet date Historical exchange rate Cumulative translation adjustment To Accumulated Other Comprehensive Income

  10. Translation and Consolidation The local currency for German Corporation is euro( ), which is also the functional currency. On October 1, 20X1, the subsidiary declared and paid dividends of 6,250. The subsidiary received $4,200 in sales transactions with a U.S. company when the exchange rate was $1.20 = 1. On January 1, 20X1, Peerless Products (U.S.) purchases 80 percent of the outstanding capital stock of German Company (Germany) for $54,000.

  11. Translation and Consolidation Relevant direct spots exchange rates ($/ 1) are: Date Rate January 1, 20X1 $1.20 October 1, 20X1 1.36 December 31, 20X1 1.40 20X1 average 1.30 Jan. 1, 20X1 Investment in Germany Company Stock 54,000 Cash 54,000 Purchase of Germany Company stock.

  12. Translation and Consolidation G 1/1/X1 80% P Investment cost $54,000 Book value of investment: Common stock $48,000 Retained earnings 12,000 Total $60,000 Percent of German Company’s stock acquired by Peerless Company x .80 (48,000) Differential attributed to goodwill $ 6,000

  13. Jan. 1, 2001--Translation Trial Balance Current exchange rate on balance sheet date Balance Exchange Balance, Item Rate $ Cash 2,500 1.20 3,000 Receivables 10,000 1.20 12,000 Inventory 7,500 1.20 9,000 Plant and Equipment 50,000 1.20 60,000 Total Debits 70,000 84,000 Accumulated dep 5,000 1.2 6,000 Account Payable 2,500 1.2 3,000 Bonds Payable 12,500 1.2 15,000 Common Stock 40,000 1.2 48,000 Retained Earnings 10,000 1.2 12,000 Total Credits 70,000 84,000

  14. January 1, 20X1 Workpaper Peerless German Eliminations Item Products Company Debits Credits Consolidated Investment in German Co. Stock 54,000 Differential Common Stock 500,000 48,000 Retained Earnings 300,000 12,000 Noncontrolling Interest

  15. January 1, 20X1 Workpaper Peerless German Eliminations Item Products Company Debits Credits Consolidated Investment in German Co. Stock 54,000 54,000 Differential 6,000 Common Stock 500,000 48,000 48,000 500,000 Retained Earnings 300,000 12,000 12,000 300,000 Noncontrolling Interest 12,000 12,000 Noncontrolling Interest = ($48,000 + $12,000) x .20 = $12,000

  16. January 1, 20X1 Workpaper Peerless German Eliminations Item Products Company Debits Credits Consolidated Investment in German Co. Stock 54,000 54,000 Differential 6,000 6,000 Patent 6,000 6,000 Common Stock 500,000 48,000 48,000500,000 Retained Earnings 300,000 12,000 12,000300,000 Noncontrolling Interest 12,00012,000 Assign differential

  17. Dec. 31, 2001--Translation Trial Balance Current exchange rate on balance sheet date Weighted-average exchange rate Historical exchange rate on date of declaration Balance Exchange Balance, Item Rate $ Cash 10,750 1.40 15,050 Foreign Currency Units 3,000 1.40 4,200 Receivables 10,500 1.40 14,700 Inventory 5,000 1.40 7,000 Plant and Equipment 50,000 1.40 70,000 Cost of Goods Sold 22,500 1.30 29,250 Operating Expenses 14,500 1.30 18,850 Foreign Currency Transaction Loss 500 1.30 650 Dividends Paid 6,250 1.36 8,500 Total Debits 123,000 168,200

  18. Dec. 31, 2001--Translation Trial Balance Current exchange rate on balance sheet date Weighted average exchange rate Historical exchange rate on date of acquiring subsidiary From the beginning of year translation workpaper Balance Exchange Balance, Item Rate $ Accumulated Depreciation 7,500 1.40 10,500 Accounts Payable 3,000 1.40 4,200 Bonds Payable 12,500 1.40 17,500 Common Stock 40,000 1.20 48,000 Retained Earnings (1/1) 10,000 * 12,000 Sales 50,000 1.30 65,000 Total128,000 157,200 Accumulated Other Comprehensive Income-- Translation Adjustment 11,000 Total Credits 168,200 *From the January 1, 20X1, translation workpaper.

  19. Proof of Translation Adjustment Translation Rate $ Peerless Products and Subsidiary Net assets at beginning of year 50,000 1.20 60,000 Adjustment for changes in net assets position during year: Net income for year 12,500 1.30 16,250 Dividends paid ( 6,250) 1.36 (8,500) Net assets translated at: Rates during year 67,750 Rates at end of year 56,250 1.40 78,750 Change in other comprehensive income-- translation adjustment during year (net increase) 11,000 Accumulated other comprehensive income-- translation adjustment, 1/1 -0- Accumulated other comprehensive income-- translation adjustment, 12/31 (credit) 11,000

  20. Translated Balance Sheet--12/31/X1 Translated Balance Sheet, 12/31/X1 Net assets $78,750 Common stock 60,000 Retained earnings 7,750 (net income less dividends) Accumulated other comprehensive income--translation adjustment 11,000 $78,750 $78,750

  21. Entries on Parent Company’s Books 6,250 x .80 x $1.36 exchange rate On October 1, 20X1, Peerless Products received a dividend of DM 10,000 and immediately converted it to U.S. dollars. October 1, 20X1 Cash 6,800 Investment in German Company Stock 6,800 Dividend received from foreign subsidiary.

  22. Entries on Parent Company’s Books 12,500 x .80 x $1.30 average exchange rate Equity in the net income of foreign subsidiary is recorded on December 31, 20X1. December 31, 20X1 Investment in German Company Stock 13,000 Income from Subsidiary 13,000 Equity in net income of foreign subsidiary.

  23. Entries on Parent Company’s Books 500 x $1.30 Amortization of the parent’s portion of the differential assigned to the patent is recorded on December 31, 20X1: December 31, 20X1 Income from Subsidiary 650 Investment in German Company Stock 650 Amortize differential.

  24. Entries on Parent Company’s Books An entry is needed to record the portion of the translation adjustment on the increase in the differential on the investment in foreign subsidiary. December 31, 20X1 Investment in German Company Stock 950 Other Comprehensive Income-- Translation Adjustment 950 Recognize translation adjustment on increase in differential.

  25. Entries on Parent Company’s Books $11,000 x .80 ownership Peerless Products’ share of the translation adjustment is recorded on December 31, 20X1. December 31, 20X1 Investment in German Company Stock 8,800 Other Comprehensive Income-- Translation Adjustment 8,800 Parent’s share of change in translation adjustment from translation of subsidiary’s accounts.

  26. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 12,350 Dividends Declared (60,000 (8,500) Investment in S 69,300 ) An entry is needed to eliminate the income from subsidiary.

  27. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 12,350 (3) 12,350 Dividends Declared (60,000 (8,500) (3) 6,800 Investment in S 69,300 (3) 5,550 )

  28. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000) (8,500) (3) 6,800 Noncontrolling Interest An entry should be made to assign income to noncontrolling interest.

  29. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest (4) 3,250 3,250 Dividends Declared (60,000) (8,500) (3) 6,800 (4) 1,700 (60,000 Noncontrolling Interest (4) 1,550 )

  30. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Other Comp Inc 9,750 11,000 Investment in S 69,300 (3) 5,550 NCI 1,550

  31. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Other Comp Inc 9,750 11,000 8,800 590,000 2,200 Investment in S 69,300 (3) 5,550 8,800 NCI 1,550 2,200

  32. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, Jan. 1 300,000 12,000 Investment in Special Foods Stock 69,300 (3) 5,550 8,800 Differential Common Stock 500,000 48,000 Noncontrolling (4) 1,550 Interest 2,200 An entry is required to eliminate the beginning investment balance.

  33. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, Jan. 1 300,000 12,000 (5)12,000 300,000 Investment in Special Foods Stock 69,300 (3) 5,550 8,800 (5) 54,000 Differential 6,000 Common Stock 500,000 48,000 (5)48,000 500,000 Noncontrolling 1,550 Interest (4) 2,200 (5) 12,000 15,750

  34. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Investment in Special Foods Stock 69,300 (3) 5,550 8,800 (5) 54,000 Differential 6,000 An entry is needed to eliminate intercompany downstream sale of inventory.

  35. December 31, 20X1 Workpaper 20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Investment in Special Foods Stock 69,300 (3) 5,550 8,800 (5) 54,000 950 Differential 6,000 6,950 950 Patent 6,950

  36. Situations Requiring Remeasurement The major reason for remeasurement is Item 5. 5. The foreign entity is located in a hyperinflationary economic environment. 1. A foreign sales branch or subsidiary of a U.S. manufacturer which primarily takes orders from foreign customers for U.S.-manufactured goods, which bills and collects from foreign customers. 2. A foreign division, branch, or subsidiary which primarily manufactures a subassembly that is shipped to a U.S. plant. 3. A foreign shipping subsidiary which primarily transports ore from a U.S. Company’s foreign mines to the United States for processing. 4. A foreign subsidiary which is primarily a conduit for Eurodollar borrowing to finance operations in the United States 5. The foreign entity is located in a hyperinflationary economic environment.

  37. The major reason for remeasurement is Item 5. 5. The foreign entity is located in a hyperinflationary economic environment.

  38. Remeasuring a Foreign Entity’s Trial Balance Income statement accounts: Weighted-average exchange rate, except revenue from nonmonetary items (historical exchange rate) Revenue-- Weighted-average exchange rate, except costs related to nonmonetary items (historical exchange rate) Expenses--

  39. Remeasuring a Foreign Entity’s Trial Balance Balance sheet accounts: Current exchange rate Historical exchange rate Historical exchange rate Prior period’s balance plus income less dividends -Monetary accounts -Nonmonetary accounts -Equity capital accounts -Retained earnings Remeasurement gain or loss Included in net income

  40. Chapter Twelve The End

More Related