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)