accounting for foreign operations u reference:- u deegan c. australian financial accounting chap 28
TRANSCRIPT
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Accounting for Foreign Accounting for Foreign OperationsOperations
Reference:- Deegan C. Australian Financial
Accounting Chap 28
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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
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Two types of Foreign OperationsTwo types of Foreign Operations
Self-sustaining Integrated
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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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
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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)