Video : Foreign Currency

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Foreign Currency Financial Statements

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Foreign currency translation is the process of expressing a foreign entity’s functional currency financial statements in the reporting currency. Translation adjustments are included in the cumulative translation adjustment (CTA) account, which is a component of other comprehensive income.

Functional Currency

Currency of the primary economic environment in which the entity operates :

  • Customer receipts.
  • Liability payments.

Other factors :

–Setting of sales prices.

–Sales market.

–Expenses.

–Financing.

–Intercompany transactions.

Functional Currency Determines Method

Restatement Methods

  • Temporal method

–Use if functional currency is the US dollar

  • Current rate method

–Use if the functional currency is the local currency

Kursna-lista-nova

Highly Inflationary Economy

Inflation and Functional Currency

In a highly inflationary economy

Functional currency  ———  Parent’s
                                                             reporting currency

Functional currency   ——— US Dollar
for subsidiaries of US firms in highly inflationary economies.

Highly inflationary = cumulative inflation of 100% or more over 3 years.

Translation on Acquisition Date

Translation at Acquisition

  • Foreign assets and liabilities are translated using the current rate method.
  • If functional currency = local currency :
    – Translation is appropriate.
    – Analysis of fair value/book value differentials is performed in local currency.
    – Results are translated at current rates.

Remeasurement at Acquisition

  • Foreign assets and liabilities are translated using the current rate method.
  • If functional currency = US$ or reporting currency :
    – Remeasurement is appropriate
    – Analysis of fair value/book value differentials is performed in US$
    The ‘earliest’ historical rate generally used in remeasurement is the date of the acquisition.

Noncontrolling Interest

  • For both, remeasurement and translation, the consolidation process is applied to the financial statements as restated in US$.
  • Measures of noncontrolling interest, noncontrolling interest share, and controlling interest share are computed in US$.

Current Rate Method and Temporal Method

Current Rate Method

Translating the adjusted trial balance:

Debits

  • Assets, contra liabilities = year end rate
  • Expenses = average rate
  • Dividends = historical rate

Credits

  • Liabilities, contra assets = year end rates
  • Equity = historical
  • Except retained earnings;
    – Use last year’s translated amounts
    – If first year, use historical rate
  • Revenues = average rate

Subtotal debits and credits. The difference is accumulated other comprehensive income from the translation adjustment.

Temporal Method

Remeasuring the adjusted trial balance:

Debits

  • Assets, contra liabilities = Year end or historical rates
  • Expenses = historical or average rate
  • Dividends = historical rate

Credits

  • Liabilities, contra assets = year end or historical rates
  • Equity = historical
  • Except retained earnings;
    – Use last year’s translated amounts
    – If first year, use historical rate
  • Revenues = average or historical rate

Subtotal debits and credits. The difference is an exchange gain or loss for the current period from the remeasurement process.

Translation Adjustments and Remeasurement Gain/Loss

Balancing the Worksheet

Mathematically:

  • Apply the temporal (remeasurement) or current rate (translation) rule to all accounts
  • Subtotal debits and credits
  • Balance the worksheet by including the difference with the lower subtotal (debits or credits)
  • Label the difference appropriately

Adjustment or Gain/Loss

Remeasurement results in :

–Exchange gains or losses

–Credit to balance = exchange gain

–Debit to balance = exchange loss

–Include the gain or loss in calculating net income in US dollars.

Translation results in :

–Translation adjustment, part of accumulated other comprehensive income

–Include as part of stockholders’ equity;

  • Debit to balance = deduct from equity
  • Credit to balance = add to equity

Equity Method for Foreign Investments

Equity Method Investee

  • A US firm has a foreign investment it accounts for under the equity method.

–If functional currency is the local currency

–Translation is appropriate

  • At acquisition

–Analyze fair value and book values, compute goodwill – in local/functional currency

  • Annually

–Translate statements into US dollars

–Record other comprehensive income for translation adjustment

Consolidation of Foreign Subsidiaries

Consolidating Foreign Subsidiaries

  • The parent uses the appropriately translated or remeasured subsidiary financial statements in its consolidation worksheet.
  • Income from the subsidiary and Investment in subsidiary are eliminated.
  • Subsidiary equity accounts are eliminated (including accumulated OCI).
  • Worksheet procedures are similar to that for domestic subsidiaries.

Hedge of Net Investment

Hedge a Foreign Investment

  • Investee’s functional currency = local currency

–Effective hedges qualify for hedge treatment

–”Gains or losses” are;
translation adjustments
      – included in accumulated OCI

  • Investee’s functional currency = reporting currency

–”Hedging” is treated as speculative

–Gains or losses are currently recognized in income

 

SUMBER :

  1. Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement,  Joseph H. Anthony, and Suzanne Lowensohn
  2. https://www.pwc.com/us/en/cfodirect/publications/accounting-guides/foreign-currency-reporting.html

Mutual Holdings

What is a mutual holding company?

akuntansi-dasar

Mutual holding companies (MHCs) are a unique blend of the characteristics of the mutual cooperative institution and a stock company.   Mutual holding companies are formed by the reorganization of a mutual institution whereby the mutual forms a stock institution subsidiary which receives  all of the assets and liabilities of the mutual institution with the parent holding company retaining all the attributes of mutuality while owning at least majority  of the new stock subsidiary.  Mutual holding companies were first authorized by the section 107 of the Competitive Equality Banking Act of 1987 (Pub. Law 100-86)

banking-connecticut-cmhc

Types of Mutual Holdings

Parent Mutually Owned

IMG20180520131716[1]

Parent owns 75% of A, and through A, has 7,5% (75% x 10%) of its own (treasury) stock.

Connecting Affiliates Mutually Owned

IMG20180520132801[1]

Parent owns 80% of A, 20% of B, through A an additional 32% (80% x 40%) of B, and through B an additional 4% (20% x 20%) of A.

Treasury Stock or Conventional

Treasury stock method

–Treats parent mutually held stock as treasury stock.

–Parent has fewer shares outstanding.

–”Interdependency” assumed eliminated by treasury stock treatment.

Conventional method for mutual holding

–Treats stock as retired.

–Parent has fewer shares outstanding.

–Simultaneous set of equations.

–Fully recognizes interdependencies.

Parent Stock Mutually Held

One or more affiliates holds parent company stock :

  • Treasury stock method

–Recognize treasury stock at cost of subsidiary’s investment in parent.

–Reduce Investment in subsidiary.

  • Conventional method

–Parent treats stock as retired, reducing common stock, and additional paid in capital or retained earnings.

–Reduce Investment in subsidiary.

Comparison

  • Both methods reduce

–Income from Subsidiary for the

–Parent dividends paid to subsidiary

  • Methods result in different

–Equity accounts :

       – Treasury stock,
       – Retired common stock.

–Consolidated retained earnings

–Noncontrolling interest

Subsidiary Stock Mutually Held

Subsidiaries hold stock in each other :

–Use conventional approach.

–Treasury stock method is not appropriate;

  • It is not parent’s stock.
  • Subsidiary stock is eliminated in consolidation.

 

SUMBER :

  1. Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn
  2. http://www.americasmutualholdingcompanies.com/faq.html

 

Indirect Holdings – Akuntansi Keuangan Lanjutan II

Indirect and Mutual Holdings :
Objektives

  • Prepare consolidated statements when the parent company controls trough indirect holdings.
  • Apply consolidation procedures of indirect holdings to the special case of  mutual holdings.

akuntansi-dasar

Indirect Holdings

The indirect holding system (also multi-tiered holding system) is a system of securities clearance, settlement and ownership system where ownership information is held electronically as a book entry. It consists of one or more tiers of intermediaries between issuer and investor.

Types of Indirect

  • Father-Son-Grandson

IMG20180420052909[1]

 

 

 

 

 

Parent owns 80% of A, and through A, 60% of B (80% x 75%).

Equity Method for Father-Son-Grandson Holdings

  1. Son applies equity method for Investment in Grandson.
  2. Father applies equity method for Investment in Son.
  3. Controlling interest share of consolidated income includes :
    – Share for direct holding of son.
    – Share for indirect holding of grandson (by father through son).
  • Connecting Affiliates

IMG20180420055008[1]

Parent owns 80% of A, 25% of B, and through A an additional 32% of B (80% x 40%). Parent owns a total of 57% of B.

Indirect Holdings with Connecting Affiliates

Indirect holdings with connecting affiliates:

  1. Handle similar to Father-Son-Grandson, but
  2. Father has direct holdings in both Son and Grandson

 

Source :

  1. https://en.wikipedia.org/wiki/Indirect_holding_system
  2. Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn.