Webb Accy 402 Final F2021

Worksheet

allows for a simulated consolidation to be carried out on a regular, periodic basis without affecting the financial records of the various component companies

Fair value method:

applied by an investor when only a small percentage of a company's voting stock is held. 1. Income is recognized when the investee declares a dividend. 2. Portfolios are reported at fair value. If fair values are unavailable, investment is reported at cost

FRS includes intangible assets as U.S. GAAP does not define what to include in

long-lived assets long-lived assets

Reporting currency

the currency of the country in which the reporting entity is located. In our case, the reporting currency will always be the U.S. dollar.

current rate method

the net investment in a foreign operation is considered to be exposed to foreign exchange risk

(Temporal Method) What is the result when you translate some A's @ the current rate and others @ historical rates?

the temporal method distorts financial ratios calculated in the foreign currency

Required Segment Disclosures—General Information

General information about each operating segment: •Factors used to identify reportable operating segments. •Types of products and services from which each operating segment reported derives its revenues.

Balance Sheet - Temporal Method Exchange Rates Historical

Inventory @ Cost Prepaid Expenses P,P,& E Intangible Assets Deferred Income Capital Stock Additional PIC Dividends

Re-measurement(Temporal)

Remeasure if Recording Currency and Functional Currency differ (Remeasurement G/L included in Net Income)

Balance Sheet - Current Method Exchange Rates Composite

Retained Earnings

Balance Sheet - Temporal Method Exchange Rates Composite

Retained Earnings

Segment Accounting 10% thresholds: Revenues greater than equal 10% combined segment revenue Profit and Loss greater than or equal to absolute value of combined profit or combined loss (winner) Asset greater than or equal to 10% total assets

Revenue Test Profit & Loss Test (absolute value x 10% ; choose winner) Asset Test

Income Statement - Current Method Exchange Rates Average

Revenues Most Expenses COGS Depreciation of P,P,& E Amortization of Intangibles

The basic assumption underlying the current rate method

a company's net investment in a foreign operation is exposed to foreign exchange risk (a foreign operation represents a foreign currency net asset and if the foreign currency decreases in value against the U.S. dollar, a decrease in the U.S. dollar value of the foreign currency net asset occurs)

FASB ASC 815

a hedge of a net investment in a foreign operation and stipulates that gains and losses on hedging instruments used in this manner should be treated in the same fashion as the translation adjustment (remeasurement gain/loss) being hedged.

(Current Rate Method) depreciation in the foreign currency results in

a negative translation adjustment (loss)

(Current Rate Method) Appreciation in the foreign currency results in

a positive translation adjustment (Gain)

What results when translating assets which are carried @ cost using the current exchange rate?

a translated value that is not readily interpretable (it is neither a current value nor a historical cost)

Entry "A" or "AL"

allocates excess payment amounts to identifiable assets and liabilities based on the fair value of the subsidiary accounts. Recognize excess from ALG items

Equity method:

applied when the investor has the ability to exercise significant influence over operating and financial policies of the investee. 1. Ability to significantly influence investee is indicated by several factors including: representation on the board of directors, participation in policy-making, interexchange of managerial personnel technological dependence 2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the outstanding voting stock of the investee is held by the investor. Income is accrued by the investor as soon as it is earned by the investee

Some companies hedge the balance sheet exposures of their foreign entities so as to

avoid adverse effects on income and/or stockholders' equity

(Temporal Method) Income statement items NOT translated @ average-for-the-period rate

cost-of-goods-sold, depreciation, and amortization expense (translated at relevant historical exchange rates)

Recording Currency

currency is the currency of the country where the company is located.

Balance sheet exposure under the temporal method

defined as cash, marketable securities, and receivables minus total liabilities

Balance sheet exposure under the current rate method is

equal to the foreign entity's net assets (stockholders' equity). 1. Appreciation in the foreign currency results in a positive translation adjustment (gain); depreciation results in a negative translation adjustment (loss)

In a company with a matrix form of organization, IFRS permits _________ ________ to be based on __________ ____ , as opposed to products/services. GAAP ________ permit geographic area.

operating segments ; geographic area Does Not

FASB ASC 830

provides guidelines for the translation of foreign currency financial statements by U.S.- based multinational corporations. The appropriate translation method and disposition of translation adjustment depends upon the functional currency of the foreign entity

The paradox of hedging balance sheet exposure is that by avoiding a translation adjustment (remeasurement gain/loss)

realized foreign exchange gains and losses can arise

Segments must be added until

the 75 percent test is met (even if the additional segments do not meet the reportable segment criteria).

(Current Rate Method) How are income items, such as gains and losses, translated?

the actual exchange rate on the date of occurrence

(Current Rate Method) How are revenues and expenses which occur evenly throughout the period translated?

the average-for-the-period exchange rate

Functional currency

the currency of the country in which most of the economic transactions of the company occur.

Significant influence is

the power to participate in the financial and operating policy decisions of the investee without the power to control or jointly control those policies.

The major difference between a translation adjustment resulting from the use of the temporal method and a foreign exchange gain or loss

the translation adjustment is not necessarily realized through inflows or outflows of cash

primary objective of the temporal method

to maintain the underlying valuation method used by the foreign entity to account for its assets and liabilities

The basic objective underlying the temporal method of translation

to produce a set of U.S. dollar-translated financial statements as if the foreign subsidiary had actually used U.S. dollars in conducting its operations

(Temporal Method) A&L's carried at current or future value

translated @ current exchange rate

(Temporal Method) A&L's carried at historical value

translated @ historical exchange rates

(Current Rate Method) equity

translated at historical rates.

(Current Rate Method) assets and liabilities

translated at the current exchange rate

Consolidation:

when one firm controls another (e.g., when a parent has a majority interest in the voting stock of a subsidiary or control through variable interests, their financial statements are consolidated and reported for the combined entity

Information about Geographic Area

•For companies with international activities, two items must be reported: -Revenues from external customers. -Long-lived assets for 1)The domestic country. 2)All foreign countries in total in which the enterprise derives revenues or holds assets. 3)Each foreign country in which a material amount of revenue is derived or assets are held. •If the company has only one operating segment and does not provide segment information, it must report geographic area information.

Reconciliations to Consolidated Totals

•The total of reportable segments' revenues must be reconciled to consolidated revenues. •The total of reportable segments' profit or loss must be reconciled to consolidated income before tax. •The total of the reportable segments' assets must be reconciled to consolidated total assets.

Segment reporting provides information to help users of financial statements to:

-Better understand the enterprise's performance. -Better assess the entity's prospects for future net cash flows. -Make more informed judgments about the enterprise as a whole.

Although a maximum number is not prescribed, FASB ASC 280-10-50-18 suggests that

10 separately reported segments might be the practical limit.

(FASB ASC 280) - Operating Segments

2) Operating segments are components of an enterprise which meet three criteria. 1. Engage in business activities and earn revenues and incur expenses. 2. Operating results are regularly reviewed by the chief operating decision-maker to assess performance and make resource allocation decisions. 3. Discrete financial information is available from the internal reporting system.

(FASB ASC 280) - Approach

1) follows a management approach in which segments are based on the way that management disaggregates the enterprise for making operating decisions (referred to as operating segments)

(Temporal Method) The U.S. dollar translation adjustment is realized only if

1. The parent sends U.S. dollars to the foreign subsidiary to pay all of its liabilities. 2. The subsidiary converts its receivables and marketable securities into cash and then sends this amount plus the amount in its cash account to the U.S. parent, which converts it into U.S. dollars.

(Temporal Method) When does a net liability exposure often exist?

1. When a liability balance sheet exposure exists, depreciation of the foreign currency results in a positive translation adjustment (gain) and appreciation of the foreign currency results in a negative translation adjustment (loss). 2. Reporting a translation loss when the foreign currency appreciates is thought to be inconsistent with economic reality.

(FASB ASC 280) - Quantitative Threshold Tests

3) Once operating segments have been identified, three quantitative threshold tests are then applied to identify segments of sufficient size to warrant separate disclosure. Any segment meeting even one of these tests is separately reportable. 1. Revenue test—segment revenues, both external and intersegment, are 10 percent or more of the combined revenue, external and intersegment, of all reported operating segments. 2. Profit or loss test—segment profit or loss is 10 percent or more of the greater (in absolute terms) of the combined reported profit of all profitable segments or the combined reported loss of all segments incurring a loss. 3. Asset test—segment assets are 10 percent or more of the combined assets of all operating segments.

The combined sales revenues of the disclosed segments must be at least

75 percent of total company sales, excluding intra-entity sales.

(FASB ASC 280) - Enterprise-wide Disclosures (required)

A. Information about products and services. 1. Additional information must be provided if operating segments have not been determined based on differences in products and services, or if the enterprise has only one operating segment. 2. In those situations, revenues derived from transactions with external customers must be disclosed by product or service. B. Information about geographic areas. 1. Revenues from external customers and long-lived assets must be reported for (a) the domestic country, (b) all foreign countries in which the enterprise has assets or derives revenues, and (c) each individual foreign country in which the enterprise has material revenues or material long-lived assets. 2. U.S. GAAP does not provide any specific guidance with regard to determining materiality of revenues or long-lived assets; this is left to management's judgment. C. Information about major customers. 1. The volume of sales to a single customer must be disclosed if it constitutes 10 percent or more of total sales to unaffiliated customers. 2. The identity of the major customer need not be disclosed.

Translation Ratios : Current

A/P A/R Accum. Dep. Buildings Cash N/P Patent

Remeasurement Ratios : Current

A/P A/R Cash N/P

Remeasurement Ratios : Historical

Accumulated Depreciation Amortization Expense Buildings Common Stock Depreciation Expense Dividends Patents COGS (when inventory)

Translation Ratios : Average

Advertising Expense Amortization Expense Depreciation Expense Salaries Expense Sales COGS

Remeasurement Ratios : Average

Advertising Expense Salary Expense Sales

Translation of COGS

Beg. Inventory in FC [Translated @ historical] + Purchases in FC [Translated @ average] - Ending Inventory in FC [Translated @ historical] = COGS in FC

Translation of R/E

Beginning R/E in Foreign Currency + Net Income in FC [Translated @ income stmt method] - Dividends in FC [Translated @ historic when declared] = Ending R/E in FC

Income Statement - Temporal Method Exchange Rates Historical

COGS Depreciation of P,P,& E Amortization of Intangibles

Balance Sheet - Current Method Exchange Rates Historical

Capital Stock Additional PIC Dividends

Balance Sheet - Temporal Method Exchange Rates Current

Cash & Receivables Marketable Securities Inventory at market Current Liab. LT Debt

Balance Sheet - Current Method Exchange Rates Current

Cash & Receivables Marketable Securities Inventory at market Inventory @ Cost Prepaid Expenses P,P,& E Intangible Assets Deferred Income Current Liab. LT Debt

Translation Ratios : Historical

Common Stock Dividends

Explanation of Measurement

Companies also must explain the measurement of segment profit or loss and segment assets, including a description of any differences in measuring: 1)Segment profit or loss and consolidated income before tax. 2)Segment assets and consolidated assets. 3)Segment profit or loss and segment assets. The basis of accounting for intersegment transactions also must be described

Entry "S" or "SE"

Dr. Equity (CAR - Common Stock, APIC, R.E) Cr. Investment

Indicators for determining functional currency - Sales Market

Foreign Currency - Active local sales market. Parent's Currency - Sales market mostly in parent's country or sales denominated in parent's currency.

Indicators for determining functional currency - Intra-entity transactions (intracompany)

Foreign Currency - Low volume of intra-entity transactions, not extensive interrelationship with parent's operations. Parent's Currency - High volume of intra-entity transactions and extensive interrelationship with parent's operations.

Indicators for determining functional currency - Sales Price

Foreign Currency - Not affected on short-term basis by changes in the exchange rate. Parent's Currency - Affected on short-term basis by changes in the exchange rate.

Indicators for determining functional currency - Financing

Foreign Currency - Primarily denominated in foreign currency and FC cash flows adequate to service obligations. Parent's Currency - Primarily from parent or denominated in parent currency or FC cash flows not adequate to service obligations.

Indicators for determining functional currency - Cash Flow

Foreign Currency - Primarily in FC and does not affect parent's cash flows. Parent's Currency - Directly impacts parent's cash flows on a current basis

Indicators for determining functional currency - Expenses

Foreign Currency - Primarily local costs. Parent's Currency - Primarily costs for components obtained from parent's country.

If the U.S. dollar is the functional currency

Foreign currency financial statements are "remeasured" using the temporal method with "remeasurement" gains and losses reported in operating income

(FASB ASC 280) - Operating Segment Disclosures

Information to be disclosed by operating segment. 1. General information about the operating segment including factors used to identify operating segments and the types of products and services from which each segment derives its revenues. 2. Segment profit or loss and the following components of profit or loss. a. Revenues from external customers. b. Revenues from transactions with other operating segments. c. Interest revenue and interest expense (reported separately). d. Depreciation, depletion, and amortization expense. e. Other significant noncash items included in segment profit or loss. f. Unusual items and extraordinary items. g. Income tax expense or benefit. 3. Total segment assets and the following related items. a. Investment in equity method affiliates. b. Expenditures for additions to long-lived assets

If a foreign entity operates in a highly inflationary economy (cumulative three-year inflation greater than 100%)

Its financial statements are remeasured into U.S. dollars using the temporal method and remeasurement gains and losses are reported in income

Income Statement - Temporal Method Exchange Rates Average

Revenues Most Expenses

Required Segment Disclosures—Profit or Loss

Segment profit or loss must be disclosed if it is regularly provided to or included in the measure of segment profit or loss reviewed by the chief operating decision maker: •Revenues from external customers. •Transaction revenues from other operating segments. •Interest revenue and expense (reported separately). •Depreciation, depletion, and amortization expense. •Equity in the net income of investees (equity method). •Significant noncash and unusual items. •Income tax expense or benefit.

(FASB ASC 280) - Restrictions

Several general restrictions on the presentation of operating segments exist. 1. Separately reported operating segments must generate at least 75 percent of total (consolidated) sales made by the company to outside parties. 2. Ten is suggested as the maximum number of operating segments that should be separately disclosed. If more than ten are reportable, the company should consider combining some operating segments.

Segment Accounting 75% rule of external sales (keep on adding if 10% does not yield enough external sales until 75% of external sales disclosed)

Sufficiency Test

What would be the balance for consolidated equipment?

Take the book value of the parent + book value of the subsidiary, (debit adjustment) add any excess fair value, (credit adjustment) subtract any excess depreciation results in the consolidated total for equipment.

CONTROL:

The definition of control is central to determining when two or more entities become one economic entity and therefore one reporting entity. Control of one firm by another is most often achieved through the acquisition of voting shares. The ASC (810-10-15-8) describes control as follows: The usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation.

If a foreign currency is the functional currency

The foreign entity's financial statements are "translated" using the current rate method and the resulting translation adjustment is reported as a separate component of equity. The average-for-the-period exchange rate is used to translate the foreign entity's income statement

IFRS requires disclosure of _____ ______ AND ___________ if that information is provided to the chief decision maker. GAAP requires disclosure of

Total Assets & Liabilities total assets and is silent on liabilities.

(Current Rate Method) How to measure the net investment's exposure to foreign exchange risk

Translate all A&L's of the foreign operation @ the current exchange rate. Translate Stockholders' Equity items @ the historical rate. Balance sheet exposure is = to the foreign operation's net asset position (total A's - total L's)

Translation adjustment(CurrentRate)

Translate if Reporting Currency and Functional Currency differ (Translation G/L included in Other Comprehensive Income)