Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements
Multinational
Accounting: Issues in
Financial Reporting
and Translation of
Foreign Entity
Statements
12-2
Differences in Accounting Principles
12-4
Differences in Accounting Principles
12-5
Determining the Functional Currency
12-6
Determining the Functional Currency
12-7
Determining the Functional Currency
• Functional currency
– “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 receives cash”
– Used to differentiate between foreign
operations that are self-contained and
integrated into a local environment, and those
that are an extension of the parent and
integrated with the parent
12-8
Functional Currency Indicators
12-9
Functional Currency Indicators
12-10
Translation Versus Remeasurement of
Foreign Financial Statements
• Methods used to restate foreign entity statements
to U.S. dollars:
– The translation of the foreign entity’s functional
currency statements into U.S. dollars
– The remeasurement of the foreign entity’s statements
into the functional currency of the entity
• After remeasurement, the statements must then be
translated if the functional currency is not the U.S. dollar.
• No additional work is needed if the functional currency is
the U.S. dollar
12-11
Translation Versus Remeasurement
12-12
Translation Versus Remeasurement
12-13
Translation Versus Remeasurement
• Remeasurement
– Nonmonetary items are usually translated at
the historical rate
– Revenues and expenses are translated using
the average rate
– Any imbalance that occurs because of the
application of the temporal method is included
in the calculation of net income on the income
statement
12-14
Translation Versus Remeasurement
An overview of the methods a U.S. company would use to restate a foreign
affiliate’s financial statements in U.S. dollars.
12-15
Translation
12-16
Translation
12-17
Translation
12-18
Translation
12-19
Remeasurement
12-20
Remeasurement
12-21
Remeasurement
• Statement presentation
– Remeasurement gain or loss is included in the
current period income statement, usually
under “Other Income”
– Upon completion of the remeasurement
process, the foreign entity’s financial
statements are presented as they would have
been had the U.S. dollar been used to record
the transactions in the local currency as they
occurred
12-22
Summary of the Translation and
Remeasurement Processes
12-23
Foreign Investments and
Unconsolidated Subsidiaries
• A parent company consolidates a foreign
subsidiary, except when it is unable to
exercise economic control:
1. Restrictions on foreign exchange in the
foreign country
2. Restrictions on transfers of property in the
foreign country
3. Other governmentally imposed uncertainties
12-24
Foreign Investments and
Unconsolidated Subsidiaries
• An unconsolidated foreign subsidiary is
reported as an investment on the U.S.
parent company’s balance sheet
– The U.S. company must use the equity
method if it has the ability to exercise
“significant influence”
• When the equity method is used, the investee’s
financial statements are either remeasured or
translated, depending on the determination of the
functional currency
– If the equity method cannot be applied, the
cost method is used
12-25
Foreign Investments and
Unconsolidated Subsidiaries
• Liquidation of a foreign investment
– The translation adjustment account is directly
related to a company’s investment in a foreign
entity
– If the investor sells a substantial portion of its
stock investment, FASB Interpretation No. 37
requires that the pro rata portion of the
accumulated translation adjustment account
attributable to that investment be included in
computing the gain or loss on the disposition
of the investment
12-26
Hedge of a Net Investment in a Foreign
Subsidiary
• FASB 133 permits hedging of a net
investment in foreign subsidiaries
– The gain or loss on the effective portion of a
hedge of a net investment is taken to other
comprehensive income as part of the
translation adjustment
– The amount of offset to comprehensive
income is limited to the translation adjustment
for the net investment
– Any excess must be recognized currently in
earnings
12-27
Disclosure Requirements
12-28
Additional Considerations
12-29
Additional Considerations
12-30
Additional Considerations
• Intercompany transactions
– Assume that a U.S. company has a foreign
currency–denominated receivable from its
foreign subsidiary
– The U.S. company would first revalue the
receivable to its U.S. dollar equivalent value
as of the date of the financial statements
– After the foreign affiliate’s statements have
been translated or remeasured, the receivable
should be at the same U.S. dollar value and
can be eliminated
12-32
Additional Considerations
• Intercompany transactions
– FASB 52 provides an exception when the
intercompany foreign currency transactions
will not be settled within the foreseeable future
– These transactions may be considered part of
the net investment in the foreign entity
– The translation adjustments on these are
deferred and accumulated as part of the
cumulative translation account
12-33
Additional Considerations
• Income taxes
– Interperiod tax allocation is required whenever
temporary differences exist in the recognition of
revenue and expenses for income statement purposes
and for tax purposes
– Exchange gains and losses from foreign currency
transactions require the recognition of a deferred tax if
they are included in income but not recognized for tax
purposes in the same period
– A deferral is required for the portion of the translation
adjustment related to the subsidiary’s undistributed
earnings that are included in the parent’s income
12-34
Additional Considerations
• Income taxes
– Deferred taxes need not be recognized if the
undistributed earnings will be indefinitely
reinvested in the subsidiary
– If the parent expects eventually to receive the
presently undistributed earnings of a foreign
subsidiary, deferred tax recognition is
required, and the tax entry would be:
12-35
Additional Considerations
12-36