Chapter 13 - Translation of financial statements of foreign affiliates. In the last chapter we discussed individual transactions with foreign businesses. In this chapter we will discuss how to consolidate a foreign subsidiary. There are a number of problems in this, most especially what exchange rate must be used to translate the numbers in the trial balances. Again, there are many new terms with specific definitions of which you should take special note. | Translation of Financial Statements of Foreign Affiliates 1 Learning Objectives Distinguish between the current exchange rate and the historical exchange rate. Understand the objectives of financial statement translation. Identify the functional currency of a foreign entity. Compare the two methods used to convert the financial statements of a foreign entity into . dollars. Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP. 2 Learning Objectives Explain the factors involved in translating the statements of a foreign entity operating in a highly inflationary economy. Translate the statements of a foreign entity when the functional currency is the local currency. Translate the statements of a foreign entity when the functional currency is the . dollar. Understand the concept of comprehensive income in the context of foreign currency translation. Identify the disclosure requirements for firms with foreign entities. 3 Translation of Financial Statements A . company may be involved in foreign activities through the operations of a: branch, subsidiary, or investee company. If the foreign entity maintains its books in a foreign currency, Its accounts must be restated into . dollars before they are combined or consolidated or the equity method of accounting applied. 4 Accounting for Operations in Foreign Countries A foreign subsidiary is consolidated if the parent company owns, directly or indirectly, a controlling interest in the voting stock of the subsidiary. Exceptions include: The intent to control is likely to be temporary. Control does not actually rest with the parent company. Government imposed: Restriction on withdrawal of assets Exchange restrictions. 5 Foreign statements that are not in conformity with . GAAP must be adjusted to conform to . standards before conversion into . dollars. The conversion from another currency into the currency of the parent company is frequently called . | Translation of Financial Statements of Foreign Affiliates 1 Learning Objectives Distinguish between the current exchange rate and the historical exchange rate. Understand the objectives of financial statement translation. Identify the functional currency of a foreign entity. Compare the two methods used to convert the financial statements of a foreign entity into . dollars. Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP. 2 Learning Objectives Explain the factors involved in translating the statements of a foreign entity operating in a highly inflationary economy. Translate the statements of a foreign entity when the functional currency is the local currency. Translate the statements of a foreign entity when the functional currency is the . dollar. Understand the concept of comprehensive income in the context of foreign currency translation. Identify the disclosure requirements for firms with foreign entities. 3 .
