Here we are going to cover the detailed discussion of accounting for foreign subsidiaries and operations of multinational firms. The main issue is how to convert the income and amounts of a foreign subsidiary into the parent’s consolidated financial statements. For this case we have to consider two methods of accounting for foreign operations that are re-measurement via the temporal method of translation via the all-current method.
Foreign currency can affect a multinational firm’s financial statement in two ways:
The different currencies involved in multinational accounting are as follows
Methods for Re-measurement/Translation
The following methods are used for Re-measurement and Translation of currency for companies using different currencies.
The below picture shows the use of different methods for Re-measurement/Translation of Local Currency.
Temporal/All-current Method Exchange Rates
The following table shows the currency rates used for different balance sheet and Profit/Loss statement entries under these two methods.
Impact of Changing Exchange Rate
The following table shows the impact of changing exchange rate on exposure.
All-current/Temporal Method Example
Let aUScompany XYZCo has a subsidiary ABCco located in some other country. XYZco reports its financial results in US Dollars ($) and ABCco in Local currency (LC).
The Balance Sheet of ABCco for 2009 and 2010 is given below
The Income Statement of ABC co for 2010 is given below
The following data about the exchange rates between the US dollar and the local currency observed
ABC co’s 2010 Translated Income statement under the All Current Method
ABC co’s 2010 Translated Balance Sheet under the All-current Method
Beginning (2010) retained earnings were $50, so ending (2010) retained earnings are $50 + $333.3 = $383.3
Cumulative Translation Statement (CTS) is the plug figure that makes the accounting equation balance: $1295.3 assets – $749.9 liabilities – $200.0 common stock – $383.3 retained earnings = -$37.9
ABC co’s 2010 Re-measured Balance Sheet under the Temporal Method
Retained earnings is a plug figure that makes the accounting equation balance: $1350 assets – $749.9 liabilities – $200.0 common stock = $400.7 retained earnings
ABCco’s 2010 Translated Income statement under the All Current Method
Remeasurement gain: $350.7 – $302.5 = $48.2
All-Current/Temporal Method Comparison for ABCco
We can make the following observations from the results: