• Multi Country Financial Reporting by MNCs

    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.

    Currency types

    Foreign currency can affect a multinational firm’s financial statement in two ways:

    • The multinational firms engage in business transactions that are denominated in a foreign currency.
    • The multinational firms may invest in subsidiaries that maintain their books and records in a foreign currency.

    The different currencies involved in multinational accounting are as follows

    • The local currency is the currency of the country being referred to.
    • The functional currency is the currency in which the entity operates. It can be the local currency.
    • The presentation currency is the currency in which the entity prepares the financial statement.

    Methods for Re-measurement/Translation

    The following methods are used for Re-measurement and Translation of currency for companies using different currencies.

    • If the functional currency and the parent’s presentation currency differ, the all-current method is used to translate the foreign currency financial statements. Translation usually involves self contained, independent subsidiaries whose operating, investing and financing activities are decentralized from the parent.
    • If the functional currency is the same as the parent’s presentation currency, the temporal method is used to re-measure the foreign currency financial statements. Re-measurement usually occurs when a subsidiary is well integrated with the parent.
    • If the local currency, the functional currency and the presentation currency all differ, both the temporal and the all-current methods are used.

    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

    • December 31, 2009: $0.50 = LC1.00
    • December 31, 2010: $0.4545 = LC1.00
    • Average for 2010: $0.4762 = LC1.00
    • Historical rate for Equity: $0.50 = LC1.00
    • Historical rate for fixed assets: $0.4881 = LC1.00
    • Historical rate for depreciation: $0.4896 = LC1.00
    • Historical rate for Cost of Goods Sold: $0.4834 = LC1.00
    • Historical rate for depreciation: $0.4878 = LC1.00
    • Use the average rate to value Ending Inventory

    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:

    • Income before translation gain is different under these two methods.
    • This is because COGS and Depreciation are translated/remeasured at different rates under these two methods.
    • The translation gain/loss is different between the two methods, its not even the same sign.
    • Under the all-current method, net assets are exposed to depreciating currency which results in a loss.
    • Under the temporal method, net monetary liabilities are exposed which results in a gain.
    • Net income is different under both the method.
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