On January 1, 2010, Parker, Inc., a U.S.-based firm, acquired 100 percent of Suffolk PLC located in Great Britain for consideration paid of 52,000,000 British pounds (£), which was equal to fair value. The excess of fair value over book value is attributable to land (part of property, plant, and equipment) and is not subject to depreciation. Parker accounts for its investment in Suffolk at cost. On January 1, 2010, Suffolk reported the following balance sheet:
Cash . . . £ 2,000,000 Accounts payable . . . £ 1,000,000 Accounts receivable . . . 3,000,000 Long-term debt . . . 8,000,000 Inventory . . . 14,000,000 Common stock . . . 44,000,000 Property, plant, and Retained earnings . . . 6,000,000
equipment (net) . . . 40,000,000 £59,000,000
£ 59,000,000
Suffolk’s 2010 income was recorded at £2,000,000. It declared and paid no dividends in 2010.
On December 31, 2011, two years after the date of acquisition, Suffolk submitted the following trial balance to Parker for consolidation:
Cash . . . £ 1,500,000 Accounts Receivable . . . 5,200,000 Inventory . . . 18,000,000 Property, Plant, and Equipment (net) . . . 36,000,000 Accounts Payable . . . (1,450,000) Long-Term Debt . . . (5,000,000) Common Stock . . . (44,000,000) Retained Earnings (1/1/11) . . . (8,000,000) Sales . . . (28,000,000) Cost of Goods Sold . . . 16,000,000 Depreciation . . . 2,000,000 Other Expenses . . . 6,000,000 Dividends Paid (1/30/11) . . . 1,750,000 –0–
Other than paying dividends, no intra-entity transactions occurred between the two companies. Relevant exchange rates for the British pound follow:
January 1 January 30 Average December 31
2010 $1.60 $1.61 $1.62 $1.64
2011 1.64 1.65 1.66 1.68
CPAskills
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Translation of Foreign Currency Financial Statements 487 The December 31, 2011, financial statements (before consolidation with Suffolk) follow. Dividend in- come is the U.S. dollar amount of dividends received from Suffolk translated at the $1.65/£ exchange rate at January 30, 2011. The amounts listed for dividend income and all affected accounts (i.e., net income, December 31 retained earnings, and cash) reflect the $1.65/£ exchange rate at January 30, 2011. Credit balances are in parentheses.
Parker
Sales . . . $ (70,000,000) Cost of goods sold . . . 34,000,000 Depreciation . . . 20,000,000 Other expenses . . . 6,000,000 Dividend income . . . (2,887,500)
Net income . . . $ (12,887,500) Retained earnings, 1/1/11 . . . $ (48,000,000) Net income, 2011 . . . (12,887,500) Dividends, 1/30/11 . . . 4,500,000
Retained earnings, 12/31/11 . . . $ (56,387,500) Cash . . . $ 3,687,500 Accounts receivable . . . 10,000,000 Inventory . . . 30,000,000 Investment in Suffolk . . . 83,200,000 Plant and equipment (net) . . . 105,000,000 Accounts payable . . . (25,500,000) Long-term debt . . . (50,000,000) Common stock . . . (100,000,000) Retained earnings, 12/31/11 . . . (56,387,500) –0–
Parker’s chief financial officer (CFO) wishes to determine the effect that a change in the value of the British pound would have on consolidated net income and consolidated stockholders’ equity. To help as- sess the foreign currency exposure associated with the investment in Suffolk, the CFO requests assis- tance in comparing consolidated results under actual exchange rate fluctuations with results that would have occurred had the dollar value of the pound remained constant or declined during the first two years of Parker’s ownership.
Required
Use an electronic spreadsheet to complete the following four parts:
Part I.Given the relevant exchange rates presented,
a. Translate Suffolk’s December 31, 2011, trial balance from British pounds to U.S. dollars. The British pound is Suffolk’s functional currency.
b. Prepare a schedule that details the change in Suffolk’s cumulative translation adjustment (beginning net assets, income, dividends, etc.) for 2010 and 2011.
c. Prepare the December 31, 2011, consolidation worksheet for Parker and Suffolk.
d. Prepare the 2011 consolidated income statement and the December 31, 2011, consolidated bal- ance sheet.
Note:Worksheets should possess the following qualities:
• Each spreadsheet should be programmed so that all relevant amounts adjust appropriately when different values of exchange rates (subsequent to January 1, 2010) are entered into it.
• Be sure to program Parker’s dividend income, cash, and retained earnings to reflect the dollar value of alternative January 30, 2011, exchange rates.
Part II.Repeat tasks (a), (b), (c), and (d) from Part I to determine consolidated net income and consol- idated stockholders’ equity if the exchange rate had remained at $1.60/£ over the period 2010 to 2011.
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488 Chapter 10
Part III.Repeat tasks (a), (b), (c), and (d) from Part I to determine consolidated net income and consol- idated stockholders’ equity if the following exchange rates had existed:
January 1 January 30 Average December 31
2010 $1.60 $1.59 $1.58 $1.56
2011 1.56 1.55 1.54 1.52
Part IV.Prepare a report that provides Parker’s CFO the risk assessments requested. Focus on prof- itability, cash flow, and the debt-to-equity ratio.
Please visit the text Web site for the online CPA Simulation
Situation: Texas Corporation, located in San Antonio, has transactions both in the United States and in Mexico although the U.S. dollar is its functional currency. In addition, Texas has a wholly owned sub- sidiary (Mexico, Inc.) located in Mexico. Consolidated financial statements are being prepared for Year 1.
The currency exchange rates are as follows for the current year (Year 1):
• January 1, Year 1: 1 peso equals $0.088.
• Average for Year 1: 1 peso equals $0.090.
• November 1, Year 1: 1 peso equals $0.092.
• December 1, Year 1: 1 peso equals $0.094.
• December 31, Year 1: 1 peso equals $0.095.
• January 31, Year 2: 1 peso equals $0.098.
Topics to be covered in simulation:
• Remeasurement process.
• Translation process.
• Foreign currency balances—impact on net income.
• Foreign currency balances—impact on comprehensive income.
• Translation adjustment.
• Functional currency.
• Forward exchange contracts as a cash flow hedge.
• Forward exchange contracts as a fair value hedge.
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Considerable differences exist across countries with respect to how fi- nancial statements are prepared and presented. As discussed in Chapter 3, for example, goodwill is an asset subject to annual impairment testing in the United States; however, in Brazil, goodwill is amortized over a maximum period of 10 years. Research and development costs are ex- pensed as incurred in the United States, but development costs must be recognized as an asset in European Union countries when certain criteria are met. Numerous other differences exist across countries. In its 2008 annual report, the Brazilian telecommunications company TIM Partici- paỗừes S.A. listed 12 significant differences between Brazilian and U.S.
GAAP.1If TIM had used U.S. accounting rules, its 2008 net income would have been 16 percent lower than the amount actually reported under Brazilian GAAP. Russian telecommunications company Rostelecom re- ported its 2008 net income under Russian Accounting Standards to be 7,072.0 million rubles; under International Financial Reporting Standards, the company reported net income of 12,182.0 million rubles, a difference of 72 percent. These examples show that diversity in accounting princi- ples across countries can have a significant impact on the amounts re- ported in financial statements. The first part of this chapter presents additional evidence of accounting diversity, explores the reasons for that diversity, and describes problems caused by accounting diversity.
Efforts have been underway for over three decades to reduce the diver- sity that exists in financial reporting across countries. The most important of these efforts has been the work that was begun by the International Ac- counting Standards Committee (IASC) and continues with the International Accounting Standards Board (IASB) to develop International Financial Reporting Standards (IFRS). Today, publicly traded companies in more than
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chapter
11
Worldwide Accounting Diversity and International Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
LO1 Explain the major factors influencing the interna- tional development of accounting systems.
LO2 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.
LO3 List the authoritative pro- nouncements that consti- tute International Financial Reporting Standards (IFRS).
LO4 Describe the ways and the extent to which IFRS are used around the world.
LO5 Describe the FASB–IASB convergence process and the SEC’s IFRS Roadmap.
LO6 Recognize acceptable ac- counting treatments under IFRS and identify key differ- ences between IFRS and U.S. GAAP.
LO7 Determine the impact that specific differences between IFRS and U.S.
GAAP have on the mea- surement of income and stockholders’ equity.
1These differences related to accounting issues such as depreciation on revalued assets, capitalization of interest, preoperating costs, provision for pensions, and goodwill amortization.
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