What is foreign currency translation?

The process of expressing amounts denominated or measured in foreign currencies into amounts
measured in the reporting currency (dollars) of the domestic entity (U.S.)
• Issues related to foreign currency translation
– The impact that changes in exchange rates between the currencies will have on the parent
company's cash flows
– What rates of exchange should be used to properly capture the impact of exchange rate
changes
– Are the accounting principles used by the foreign entity different from those of the
domestic entity?
Harmonizing of Accounting Standards
Goal: The development of consistent accounting standards will improve comparability of financial
information to
• Multinational companies
– Comparable standards for evaluation of subsidiaries, branches, other equity investments,
etc.
• Entities seeking to raise capital
– Efficient allocation and regulation of capital exchange
• Other users
– Comparable information on which to base decisions
Factors Influencing the Development of Accounting
• Social and cultural values
• Political and legal systems
• Business activities and economic conditions
• Standard-setting processes
• Forms of ownership and capital markets
• Cooperative efforts between nations
Convergence to International Accounting Standards
• Nearly 120 countries have either adopted or agreed to adopt IFRS
• EU has converged to international standards with qualification
• IFRS is principle-based rather than rule-based
Convergence: Initiatives of the FASB
• The FASB believes a single set of accounting standards for domestic and international use is the
optimal solution
• Norwalk agreement
– 2002 MoU (memorandum of understanding) with the IASB
– Formalized FASB and IASB commitment to the convergence of U.S. GAAP and
international accounting standards
• Convergence is a collaborative effort
• 2006 MoU
– Roapmap identifying convergence topics
– Encouraged the SEC to allow public, foreign companies to file statements according to
IFRS without reconciliation to U.S. GAAP

• 2010 MoU reaffirmed the 2006 MoU

– Expanded efforts to creating new accounting standards where existing standards were
deemed to be in need of significant improvement
– June 2011: target date for completing the major projects identified in the 2006 MoU
• Anticipated costs of international standard adoption
• Potential “Adopted in U.S.” qualifications
– LIFO prohibited by international standards
• FASB and the IASB have pledged to make their accounting standards fully compatible and
maintain such compatibility over time

Convergence: Initiatives of the SEC

• 2007: agreed to accept financial statements from foreign registrants prepared in accordance with
IFRS without reconciliation to U.S. GAAP
• 2010: identified 2015 as the earliest date for requiring U.S. companies to use IFRS in filings with
the SEC
– Final decision regarding the requirement to use IFRS deferred until 2011
– The SEC is not pursuing the option of early adoption
Explain the goal of interim reporting and how the interim period is viewed relative to an annual
period
• Provides information on a timely basis
• Affects the decision-making process
• Views each interim period as an integral part of the annual period
• Accounting principles employed for interim purposes are the same as those used for annual
purposes with some modification
• Summarized interim data, rather than complete financial statements, may be presented

Explain why segmental reporting is important and define an operating segment

• FASB Statement No. 131
– Defines operating segments by emphasizing a ‘‘management approach’’ which focuses
on how management organizes information for purposes of making operating decisions
and assessing performance
– The segments which emerge from an analysis of how management organizes information
for decision-making purposes are called operating segments

Describe the information about a reportable segment that must be disclosed

• Information about profit or loss and assets
– The measure of profit or loss follows a management approach focusing on internal
decision making rather than any strict definition of profit used by the enterprise
– Disclose the segment assets evaluated by the CODM
– Information presented for reportable segments must be reconciled to the respective
consolidated amounts for the enterprise as a whole
• Specified interim period disclosures

State which enterprise-wide disclosures must be provided

Enterprise-Wide Disclosures
• Report revenues from external customers for each product or service or each group of related
products or services
• Report revenues from external customers for the enterprise’s country of domicile and all foreign
countries in total
• Report long-lived assets located in the enterprise’s country of domicile and all foreign countries
in total
Disclosures Regarding Major Customers
• Required to disclose if a single customer represents 10% or more of enterprise revenues
• Federal, state, local, and foreign governments each should be considered as a single customer
• For each such customer, disclose the total amount of revenues and the segment(s) revenues are
traceable to
– Names of major customers need not be disclosed

Function of Consolidated Statements

• Present the results of operations, cash flow, and the balance sheet of both the parent and its
subsidiaries as if they were a single company
• Criteria for Consolidated Statements
– Generally, when a parent firm owns over 50% of the voting common stock of another
company
– Evidence may exist that indicates control when less than 51% of common stock is owned

Techniques of Consolidation
• Asset acquisition (Chapter 1)
– Acquired assets are recorded by acquirer
– Automatic consolidation
• Stock acquisition (Chapter 2 and following)
– Acquired company remains as a separate legal entity
– Parent records investment
– Consolidation process produces financial statements for the economic entity

Describe the special worksheet procedures that are used for an investment maintained under the
sophisticated equity method.
Effect of the Sophisticated Equity Method
 • Ramifications:
– Current year’s equity adjustment is net of excess amortizations
– The investment account contains only the remaining unamortized excess applicable to the
investment
• Distribution and amortization of excess procedures are altered:
– Distribute the remaining unamortized excess applicable to the controlling interest to the
balance sheet account; adjust the NCI for the remaining excess attributable to its share
Amortize the excess for the current year only