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Multinational Accounting: Translation of Foreign Entity Statements
12Electronic Presentation by
Douglas Cloud Pepperdine University
Baker / Lembke / KingBaker / Lembke / King
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The U.S. model, which focuses on the information needs of the common stockholder through the application of generally accepted accounting principles.
Differences in Accounting PrinciplesDifferences in Accounting Principles
Four major models of accounting
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The British model, which focuses on the information needs of bondholders, creditors, and preferred stockholders.
Differences in Accounting PrinciplesDifferences in Accounting Principles
Four major models of accounting
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The French-Italian-SpanishSpanish model, which is based on the information needs of the taxing authorities.
Differences in Accounting Principles
Four major models of accounting
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The German and Scandinavian countries model, which is extremely conservative and uses large number of reserves to reduce income to its lowest level possible.
Differences in Accounting PrinciplesDifferences in Accounting Principles
Four major models of accounting
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12-12-66Determining the Functional CurrencyDetermining the Functional Currency
FASB 52 provides specific guidelines
for translating foreign currency
financial statements.
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12-12-77Determining the Functional CurrencyDetermining the Functional Currency
What is functional currency?
FASB 52 defines it as the currency of the primary economic environment inwhich the entity operates.
Normally, that is the currency of the environment in which an entity primarily generates and expends cash.
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12-12-88Translation Versus RemeasurementTranslation 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.
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12-12-99Translating Foreign Entity’s Trial BalanceTranslating Foreign Entity’s Trial Balance
Income statement accounts:- Revenue and expenses Generally, weighted average
exchange rate for the period covered by the statement
Historical exchange rate
Current exchange rate on balance sheet date
Balance sheet accounts:- Assets and liabilities
- Stockholders’ equity
Cumulative translation adjustment
To Accumulated Other Comprehensive Income
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On January 1, 20X1, Peerless Products (U.S.) purchases 80 percent of the outstanding capital stock
of German Company (Germany) for $54,000.
Translation and ConsolidationTranslation 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 $1.20 = 1.
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12-12-1111Translation and ConsolidationTranslation and Consolidation
Relevant direct spots exchange rates ($/ 1) are:
January 1, 20X1 $1.20October 1, 20X1 1.36December 31, 20X1 1.4020X1 average 1.30
Date Rate
Jan. 1, 20X1Investment in Germany Company Stock 54,000 Cash 54,000 Purchase of Germany Company stock.
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G
Investment cost$54,000
Book value of investment:Common stock $48,000Retained earnings 12,000Total $60,000
Percent of German Company’s stock acquired by Peerless
Company x .80(48,000)
Differential attributed to goodwill$ 6,000
Translation and ConsolidationTranslation and Consolidation
1/1/X1 80%
P
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12-12-1313Jan. 1, 2001--Translation Trial BalanceJan. 1, 2001--Translation Trial Balance Balance Exchange Balance, Item Rate $
Cash 2,500 1.20 3,000Receivables 10,000 1.20 12,000Inventory 7,500 1.20 9,000Plant and Equipment 50,000 1.20 60,000Total Debits 70,000 84,000
Accumulated dep 5,000 1.2 6,000Account Payable 2,500 1.2 3,000Bonds Payable 12,500 1.2 15,000Common Stock 40,000 1.2 48,000Retained Earnings 10,000 1.2 12,000Total Credits 70,000 84,000
Current exchange rate on balance
sheet date
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Peerless German Eliminations Item Products Company Debits Credits Consolidated
Investment in German Co. Stock 54,000Differential
Common Stock 500,000 48,000Retained Earnings 300,000 12,000Noncontrolling Interest
January 1, 20X1 WorkpaperJanuary 1, 20X1 Workpaper
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Peerless German Eliminations Item Products Company Debits Credits Consolidated
Investment in German Co. Stock 54,000 54,000Differential 6,000
Common Stock 500,000 48,000 48,000 500,000Retained Earnings 300,000 12,000 12,000 300,000Noncontrolling Interest 12,000 12,000
Noncontrolling Interest = ($48,000 + $12,000) x .20 = $12,000
January 1, 20X1 WorkpaperJanuary 1, 20X1 Workpaper
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Peerless German Eliminations Item Products Company Debits Credits Consolidated
Investment in German Co. Stock 54,000 54,000Differential 6,000 6,000Patent 6,000 6,000Common Stock 500,000 48,000 48,000 500,000Retained Earnings 300,000 12,000 12,000 300,000Noncontrolling Interest 12,000 12,000
Assign differential
January 1, 20X1 WorkpaperJanuary 1, 20X1 Workpaper
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12-12-1717Dec. 31, 2001--Translation Trial BalanceDec. 31, 2001--Translation Trial Balance Balance Exchange Balance, Item Rate $
Cash 10,750 1.40 15,050Foreign Currency Units 3,000 1.40 4,200Receivables 10,500 1.40 14,700Inventory 5,000 1.40 7,000Plant and Equipment 50,000 1.40 70,000Cost of Goods Sold 22,500 1.30 29,250Operating Expenses 14,500 1.30 18,850Foreign Currency Transaction Loss 500 1.30 650Dividends Paid 6,250 1.36 8,500Total Debits 123,000 168,200
Current exchange rate on balance
sheet date
Historical exchange rate on
date of declaration
Weighted-average
exchange rate
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Accumulated Depreciation 7,500 1.40 10,500Accounts Payable 3,000 1.40 4,200Bonds Payable 12,500 1.40 17,500Common Stock 40,000 1.20 48,000Retained Earnings (1/1) 10,000 * 12,000Sales 50,000 1.30 65,000Total 128,000 157,200Accumulated Other Comprehensive Income-- Translation Adjustment 11,000Total Credits 168,200
*From the January 1, 20X1, translation workpaper.
Current exchange rate on balance
sheet dateHistorical exchange rate on date of acquiring
subsidiary
From the beginning of year
translation workpaperWeighted average
exchange rate
Dec. 31, 2001--Translation Trial BalanceDec. 31, 2001--Translation Trial Balance Balance Exchange Balance, Item Rate $
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12-12-1919Proof of Translation AdjustmentProof of Translation Adjustment Translation Rate $
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
Peerless Products and SubsidiaryPeerless Products and Subsidiary
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12-12-2020Translated Balance Sheet--12/31/X1Translated Balance Sheet--12/31/X1
Translated Balance Sheet, 12/31/X1Net 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
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12-12-2121Entries on Parent Company’s BooksEntries on Parent Company’s Books
On October 1, 20X1, Peerless Products received a dividend of DM 10,000 and
immediately converted it to U.S. dollars.
October 1, 20X1Cash 6,800
Investment in German Company Stock 6,800Dividend received from foreign subsidiary.
6,250 x .80 x $1.36 exchange rate
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12-12-2222Entries on Parent Company’s BooksEntries on Parent Company’s Books
Equity in the net income of foreign subsidiary is recorded on December 31, 20X1.
December 31, 20X1Investment in German Company Stock 13,000
Income from Subsidiary 13,000Equity in net income of foreign subsidiary.
12,500 x .80 x $1.30 average exchange rate
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12-12-2323Entries on Parent Company’s BooksEntries on Parent Company’s Books
Amortization of the parent’s portion of the differential assigned to the patent is recorded
on December 31, 20X1:
December 31, 20X1Income from Subsidiary 650
Investment in German Company Stock 650Amortize differential.
500 x $1.30
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12-12-2424Entries on Parent Company’s BooksEntries 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, 20X1Investment in German Company Stock 950
Other Comprehensive Income-- Translation Adjustment 950Recognize translation adjustment onincrease in differential.
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12-12-2525Entries on Parent Company’s BooksEntries on Parent Company’s Books
Peerless Products’ share of the translation adjustment is recorded on December 31, 20X1.
December 31, 20X1Investment in German Company Stock 8,800
Other Comprehensive Income-- Translation Adjustment 8,800Parent’s share of change in translationadjustment from translation of subsidiary’s accounts.
$11,000 x .80 ownership
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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.
20X120X1
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
)
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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
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
)
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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.
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
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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
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
)
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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
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
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Peerless Special Eliminations Item Products Foods Debits Credits Consolidated
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
Other Comp Inc 9,750 11,000 8,800 590,0002,200
Investment in S 69,300 (3) 5,5508,800
NCI 1,5502,200
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Peerless Special Eliminations Item Products Foods Debits Credits Consolidated
An entry is required to eliminate the beginning investment balance.
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
Retained Earnings, Jan. 1 300,000 12,000Investment in Special FoodsStock 69,300 (3) 5,550
8,800
DifferentialCommon Stock 500,000 48,000Noncontrolling (4) 1,550 Interest 2,200
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Peerless Special Eliminations Item Products Foods Debits Credits Consolidated
Retained Earnings, Jan. 1 300,000 12,000 (5)12,000 300,000Investment in Special FoodsStock 69,300 (3) 5,550
8,800(5) 54,000
Differential 6,000Common Stock 500,000 48,000 (5)48,000 500,000Noncontrolling 1,550 Interest (4) 2,200
(5) 12 ,000 15,750
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
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Peerless Special Eliminations Item Products Foods Debits Credits Consolidated
An entry is needed to eliminate intercompany downstream sale of inventory.
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
Investment in Special FoodsStock 69,300 (3) 5,550
8,800(5) 54,000
Differential 6,000
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Peerless Special Eliminations Item Products Foods Debits Credits Consolidated
December 31, 20X1 WorkpaperDecember 31, 20X1 Workpaper
20X120X1
Investment in Special FoodsStock 69,300 (3) 5,550
8,800(5) 54,000
950Differential 6,000 6,950
950
Patent 6,950
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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.
Situations Requiring RemeasurementSituations Requiring Remeasurement
5. The foreign entity is located in a hyperinflationary economic environment.
The major reason for remeasurement is Item 5.
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5. The foreign entity is located in a hyperinflationary economic environment.
The major reason for remeasurement is Item 5.
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12-12-3838Remeasuring a Foreign Entity’s Trial BalanceRemeasuring a Foreign Entity’s Trial Balance
Income statement accounts:Weighted-average exchange rate, except revenue from nonmonetary items (historical exchange rate)
Weighted-average exchange rate, except costs related to nonmonetary items (historical exchange rate)
Revenue--
Expenses--
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12-12-3939Remeasuring a Foreign Entity’s Trial BalanceRemeasuring a Foreign Entity’s Trial Balance
-Monetary accounts-Nonmonetary accounts-Equity capital accounts-Retained earnings
Current exchange rateHistorical exchange rateHistorical exchange ratePrior period’s balance plus
income less dividendsRemeasurement gain or loss
Balance sheet accounts:
Included in net income
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12-12-4040Chapter TwelveChapter Twelve
The The EndEnd
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