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Accounting for Foreign Accounting for Foreign OperationsOperations
Reference:- Deegan C. Australian Financial
Accounting Chap 28
ObjectivesObjectives
To be able to prepare for both self-sustaining & integrated foreign companies the translation of foreign companies financial
statements incorporate foreign companies (subsidiaries)
into the financial statements of Australia investors
Two types of Foreign OperationsTwo types of Foreign Operations
Self-sustaining Integrated
Self-SustainingSelf-Sustaining
Defined An operation that is independent financially &
operationally of the parent company and whose operations do not expose the parent to foreign exchange gains or losses
Self-Sustaining - TranslationSelf-Sustaining - Translation
The “Current Rate” method is used for self-sustaining operations
ie the Foreign operations Balance Sheet & Profit & Loss are translated to A$’s using the Current Rate method
Current Rate MethodCurrent Rate Method
Assets & Liabilities are translated using the exchange rate at Balance date.
Owners Equity translated at date of investment
Revenues & Expenses are translated at the exchange rate in place at date of the transaction
Any gain/loss is taken to the reserves
Integrated- Temporal MethodIntegrated- Temporal Method
Monetary Items- exchange rate at Balance date
Non-Monetary Items- exchange rate at transaction date if revalued exchange rate at that date
Owner’s Equity exchange rate at that date Revenue & Expenses transaction date Gain/Losses to Profit & Loss
Comparison of 2 methodsComparison of 2 methodsProfit & Loss Self Sustaining Integrated
Revenues & Expense Avg Rate Same
Depreciation Avg Rate Historical Rate(Begin)
Dividends Rate at date Same
Balance SheetMonetary Items Balance day Rate Same
Inventory Balance day Rate Date of Purchase
Non-Current Assets Balance date Rate Purchase date
Capital Date of Investment Same
Post acquisitionRetained Profits
From P & L Same
Comparison of 2 methodsComparison of 2 methodsProfit & Loss Self Sustaining Integrated
Revenues & Expense Avg Rate Same
Depreciation Avg Rate Historical Rate
Dividends Rate at date Same
Balance SheetMonetary Items Balance day Rate Same
Inventory Balance day Rate Date of Purchase
Non-Current Assets Balance date Rate Purcahse date
Capital Date of Investment Same
Post acquisitionRetained Profits
From P & L Same
Gain or lossSelf Sustaining ReserveIntegrated Profit & Loss
Exchange rates used in following Exchange rates used in following exampleexample
Begin UK1= A$2 (1/7/94) Bal Date UK1 = A$2.3 (30/6/95) Closing Inventory date UK1= A$2.2 Average UK1= A$2.1
(average given in this question- normally you would find the average ie (2+2.3)/2 = $2.15)
Nigel Inc
Income Statement for year ended 30/6/95 (from Deegan p 481)
UK Current Rate
Sales 2 500 2.1 5 250
Cost of Sales
Inventory 500 2 1 000
Purchases 2 000 2.1 4 200
End Stock 450 2.2 990
Expense 75 2.1 157.5
Depreciation 100 2.1 210
Tax 125 2.1 262.5
------ ------
Op. Profit 150 410
Retained Bal 150 2 300
------ ------
Ret.Pro.- end 300 710
Begin 1= $2Avg 1= $2.1End Inv = $2.2Bal Date= $2.3
Nigel Inc
Balance Sheet as at 30/6/95 (from Deegan p 481)
UK Current Rate
Share Capital 500 2 1 000
Foreign Currency ?
Retained P 300 710
Bank Loan 1 000 2.3 2 300
Creditors 400 2.3 920
$5 060
Plant 950 2.3 2 185
Cash & Drs 800 2.3 1 840
Inventory 450 2.3 1 035
$5 060
Begin 1= $2Avg 1= $2.1End Inv = $2.2Bal Date= $2.3
Nigel Inc
Balance Sheet as at 30/6/95 (from Deegan p 481)
UK Current Rate
Share Capital 500 2 1 000
Foreign Currency 130
Retained P 300 710
Bank Loan 1 000 2.3 2 300
Creditors 400 2.3 920
$5 060
Plant 950 2.3 2 185
Cash & Drs 800 2.3 1 840
Inventory 450 2.3 1 035
$5 060
Begin 1= $2Avg 1= $2.1End Inv = $2.2Bal Date= $2.3
Nigel Inc
Income Statement for year ended 30/6/95 (from Deegan p 481)
UK Temporal
Sales 2 500 2.1 5 250
Cost of Sales
Inventory 500 2 1 000
Purchases 2 000 2.1 4 200
End Stock 450 2.2 990
Expense 75 2.1 157.5
Depreciation 100 2 200
Foreign Exc Loss ???
Tax 125 2.1 262.5
------ ------
Op. Profit 150
Retained Bal 150 2 300
------ ------
Ret.Pro.- end 300
Begin 1= $2Avg 1= $2.1End Inv = $2.2Bal Date= $2.3
Nigel Inc
Balance Sheet as at 30/6/95 (from Deegan p 481)
UK Temporal
Share Capital 500 2 1 000
Retained P 300 510
Bank Loan 1 000 2.3 2 300
Creditors 400 2.3 920
$4 730
Plant 950 2 1 900
Cash & Drs 800 2.3 1 840
Inventory 450 2.2 990
$4 730
Begin 1= $2Avg 1= $2.1End Inv = $2.2Bal Date= $2.3
Nigel Inc
Income Statement for year ended 30/6/95 (from Deegan p 481)
UK Temporal
Sales 2 500 2.1 5 250
Cost of Sales
Inventory 500 2 1 000
Purchases 2 000 2.1 4 200
End Stock 450 2.2 990
Expense 75 2.1 157.5
Depreciation 100 2 200
Foreign Exc Loss 210
Tax 125 2.1 262.5
------ ------
Op. Profit 150 210
Retained Bal 150 2 300
------ ------
Ret.Pro.- end 300 510
Begin 1= $2Avg 1= $2.1End Inv = $2.2Bal Date= $2.3
ConsolidationConsolidation
Pre-Acquisition Entry Use rate at date of Acquisition
Dividends Use rate at date of Dividend
Intercompany date of entry (But not required for this course)
ConsolidationConsolidation
Assume in earlier example the purchase price at date of acquisition $A 1 500 Capital UK 500
Retained Profits UK 150
Exchange Rate at date of acquisition 1=$2
ConsolidationConsolidation
Assume in earlier example the purchase price at date of acquisition $A 1 500 Capital UK 500
Retained Profits UK 150 (exchange rate 1=A$2)
Fair value = 500+ 150 = 650 UK = A$ 1 300Cost = A$ 1 500Goodwill = 200
ConsolidationConsolidation
Assume in earlier example the purchase price at date of acquisition $A 1 500 Capital UK 500
Retained Profits UK 150
Fair value = 500+ 150 = 650 UK = A$ 1 300Cost = A$ 1 500Goodwill = 200
EntryDr Capital 1 000Dr Profits 300Dr Goodwill 200 Cr Shares 1 500
Tutorial Questions - from DeeganTutorial Questions - from Deegan
Exercises 28.3 ( Also prepare pre-acquisition entry for Consolidation if Shiela paid $3 000 for shares in Felicity Plc)
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