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Consolidating foreign subsidiary example

EXECUTIVE SUMMARY Accounting for currency translation risks can be very complex.

52, , to keep its accounting records in its functional currency and that currency may be different from the reporting currency.

A business unit may be a subsidiary, but the definition does not require that a business unit be a separate legal entity.

Globalization has changed the old accounting rule that debits equal credits (no plugging is permitted).

Years ago, net income became just one part of comprehensive income (CI), and the equity part of the accounting equation became: Equity = Stock Other Comprehensive Income Retained Earnings.

This may not seem like a significant issue, but goodwill arising from the acquisition of a foreign subsidiary may be a multibillion-dollar asset that will be translated at the end-of-period FX rate.

Because the terms for these two types of risk are similar, it is important to understand the difference and have a general idea of the effect that FX fluctuations have on these risks.

Globalization has changed the old accounting rule that debits equal credits.

Net income became just one part of comprehensive income, and the equity part of the accounting equation became: Equity = Stock Other Comprehensive Income Retained Earnings.

As this worksheet is created, the equations will produce the amounts shown in Exhibit 4. Hypothetical amounts for the two trial balances and the currency exchange rates are shown in green. This worksheet is based on a simple situation where a U. parent company acquired a foreign subsidiary for book value at the beginning of the year and used the cost method to record its investment.

The worksheet includes lines used later, as shown in Exhibit 5, to demonstrate how a parent company can hedge translation risk by taking out a loan denominated in the functional currency of the subsidiary. Advanced and international accounting textbooks contain more detailed examples.

The definition includes branches and equity investments. 52 as the currency of the primary economic environment in which the entity operates, which is normally the currency in which an entity primarily generates and expends cash.