1. Accounting for Foreign Operations u Reference:- u Deegan C. Australian Financial Accounting Chap 28

2. Objectives u To be able to prepare for both self- sustaining & integrated foreign companies u the translation of foreign companies financial statements u incorporate foreign companies (subsidiaries) into the financial statements of Australia investors

3. Two types of Foreign Operations u Self-sustaining u Integrated

4. Self-Sustaining u Defined u 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

5. Self-Sustaining - Translation u The “Current Rate” method is used for self- sustaining operations u ie the Foreign operations Balance Sheet & Profit & Loss are translated to A$’s using the Current Rate method

6. Current Rate Method u Assets & Liabilities are translated using the exchange rate at Balance date. u Owners Equity translated at date of investment u Revenues & Expenses are translated at the exchange rate in place at date of the transaction u Any gain/loss is taken to the reserves

7. Integrated- Temporal Method u Monetary Items- exchange rate at Balance date u Non-Monetary Items- exchange rate at transaction date if revalued exchange rate at that date u Owner’s Equity exchange rate at that date u Revenue & Expenses transaction date u Gain/Losses to Profit & Loss

8. Comparison of 2 methods

9. Gain or loss Self Sustaining Reserve Integrated Profit & Loss

10. Exchange rates used in following example u Begin UK1= A$2 (1/7/94) u Bal Date UK1 = A$2.3 (30/6/95) u Closing Inventory date UK1= A$2.2 u Average UK1= A$2.1 (average given in this question- normally you would find the average ie (2+2.3)/2 = $2.15)

11. 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= $2 Avg 1= $2.1 End Inv = $2.2 Bal Date= $2.3

12. 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= $2 Avg 1= $2.1 End Inv = $2.2 Bal Date= $2.3

13. 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= $2 Avg 1= $2.1 End Inv = $2.2 Bal Date= $2.3

14. 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= $2 Avg 1= $2.1 End Inv = $2.2 Bal Date= $2.3

15. 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= $2 Avg 1= $2.1 End Inv = $2.2 Bal Date= $2.3

16. 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= $2 Avg 1= $2.1 End Inv = $2.2 Bal Date= $2.3

17. Consolidation u Pre-Acquisition Entry u Use rate at date of Acquisition u Dividends u Use rate at date of Dividend u Intercompany u date of entry (But not required for this course)

18. Consolidation u 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

19. Consolidation u 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$2) Fair value = 500+ 150 = 650 UK = A$ 1 300 Cost = A$ 1 500 Goodwill = 200

20. Consolidation u Assume in earlier example the purchase price at date of acquisition $A 1 500 Capital UK 500 Retained Profits UK 150 Fair value = 500+ 150 = 650 UK = A$ 1 300 Cost = A$ 1 500 Goodwill = 200 Entry Dr Capital 1 000 Dr Profits 300 Dr Goodwill 200 Cr Shares 1 500

21. Tutorial Questions - from Deegan u Exercises 28.3 ( Also prepare pre- acquisition entry for Consolidation if Shiela paid $3 000 for shares in Felicity Plc)