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Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
CHAPTER 12
MULTINATIONAL ACCOUNTING:
ISSUES IN FINANCIAL REPORTING AND TRANSLATION OF
FOREIGN ENTITY STATEMENTS
OVERVIEW OF CHAPTER
Chapter 12 begins with a discussion that highlights that international differences exist in
accounting principles utilized to measure economic activities. The discussion also points out that
the IASB has a mandate to establish a set of international financial reporting standards and to
encourage adoption of those standards globally. Many believe that convergence to a single set of
international standards is key to economic development.
The determination of the foreign affiliate's functional currency is an essential step in
selecting a method to translate the foreign affiliate's financial statements into U.S. dollars. The
functional currency may be the local currency unit of the foreign affiliate, the U.S. dollar, or a
third currency. ASC 830 provides specific guidelines for translating a foreign currency into U.S.
dollars to allow preparation of consolidated financial statements measured, or denominated, in
dollars.
Both translation and remeasurement of the foreign affiliate's financial statements are
presented and extensively illustrated. The translation approach is discussed first because most
students will find this to be easier than the remeasurement approach. The Peerless Products
Company acquires a German subsidiary and the same base data is used for both translation and
remeasurement.
The chapter illustrates the worksheet translation and the remeasurement of the foreign
affiliate's financial statements into U.S. dollars and then the chapter illustrates the consolidation
worksheets that are required to prepare the consolidated statements of the U.S. parent company
and the foreign subsidiary. Students may have some difficulty making the consolidation entries
for the allocation and amortization of the differential under the translation method. This process
is fully illustrated in the text and instructors may want to spend a little extra time covering this
process. The proof of the translation adjustment is presented in the chapter, but the proof of the
remeasurement gain or loss is presented in the additional considerations section of the chapter.
ASC 220 requires that the change in the translation adjustment during the period be
reported in Other Comprehensive Income (OCI). Then, the translation adjustment is
accumulated in the stockholders’ equity section as a component of Accumulated Other
Comprehensive Income (AOCI). The parent company recognizes its share of the subsidiary’s
translation adjustment.
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
ASC 815 permits hedging of a net investment in foreign subsidiaries. Necessary journal
entries to account for such hedges are presented in the chapter.
The additional considerations section also presents various technical issues such as the
lower-of-cost-or-market inventory valuation under remeasurement, intercompany transactions
with a foreign affiliate, interperiod tax allocation resulting from the translation adjustment, and
translation when a third currency is the functional currency.
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 12-1 Understand and explain the benefits and ramifications of convergence to
International Financial Reporting Standards (IFRS) and the expected timeline to
global convergence.
LO 12-2 Determine the functional currency and understand the ramifications of different
functional currency designations.
LO 12-3 Understand and explain the differences between translation and remeasurement.
LO 12-4 Make calculations and translate financial statements of a foreign subsidiary.
LO 12-5 Prepare consolidated financial statements including a foreign subsidiary after
translation.
LO 12-6 Make calculations and remeasure financial statements of a foreign subsidiary.
LO 12-7 Prepare consolidated financial statements including a foreign subsidiary after
remeasurement.
LO 12-8 Understand other issues related to foreign operations including the hedging of a net
investment in a foreign subsidiary.
SYNOPSIS OF CHAPTER 12
Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
McDonald’s—The World’s Fast Food Favorite
LO 12-1 Understand and explain the benefits and ramifications of convergence to
International Financial Reporting Standards (IFRS) and the expected timeline to
global convergence.
Convergence of Accounting Principles
Accounting for Differences in Currencies and Exchange Rates
Currency Definitions
LO 12-2 Determine the functional currency and understand the ramifications of different
functional currency designations.
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
Determination of the Functional Currency
Functional Currency Designation in Highly Inflationary Economies
LO 12-3 Understand and explain the differences between translation and remeasurement.
Translation versus Remeasurement of Foreign Financial Statements
LO 12-4 Make calculations and translate financial statements of a foreign subsidiary.
Translation of Functional Currency Statements into the Reporting Currency of the U.S.
Company
Financial Statement Presentation of Translation Adjustment
LO 12-5 Prepare consolidated financial statements including a foreign subsidiary after
translation.
Illustration of Translation and Consolidation of a Foreign Subsidiary
Noncontrolling Interest of a Foreign Subsidiary
LO 12-6 Make calculations and remeasure financial statements of a foreign subsidiary.
Remeasurement of the Books of Record into the Functional Currency
Statement Presentation of Remeasurement Gain or Loss
Illustration of Remeasurement of a Foreign Subsidiary
Proof of Remeasurement Exchange Gain
LO 12-7 Prepare consolidated financial statements including a foreign subsidiary after
remeasurement.
Remeasurement Case: Subsequent Consolidation Worksheet
Summary of Translation versus Remeasurement
LO 12-8 Understand other issues related to foreign operations including the hedging of a net
investment in a foreign subsidiary.
Additional Considerations in Accounting for Foreign Operations and Entities
Foreign Investments and Unconsolidated Subsidiaries
Liquidation of a Foreign Investment
Hedge of a Net Investment in a Foreign Subsidiary
Disclosure Requirements
Statement of Cash Flows
Lower-of-Cost-or-Market Inventory Valuation under Remeasurement
Intercompany Transactions
Income Taxes
Translation When a Third Currency Is the Functional Currency
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.
We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors
to use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of
each learning objective to show where the new material begins. Instructors may or may not want
to use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple-choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
LO 12-1 Understand and explain the benefits and ramifications of convergence to International
Financial Reporting Standards (IFRS) and the expected timeline to global
convergence.
• Slides 3-6 discuss efforts of the FASB and IASB to converge to a single set of
accounting principles.
LO 12-2 Determine the functional currency and understand the ramifications of different
functional currency designations.
• Slides 10-14 define and explain indicators of functional currency.
LO 12-3 Understand and explain the differences between translation and remeasurement.
• Slides 18-25 introduce two methods for restating foreign financial statements to U.S.
dollars: translation and remeasurement. The discussion here is very basic without too
much detail.
• Slides 26-28 provide an example of both translation and remeasurement.
LO 12-4 Make calculations and translate financial statements of a foreign subsidiary.
• Slides 32-36 introduce concepts related to translation.
LO 12-5 Prepare consolidated financial statements including a foreign subsidiary after
translation.
• Slides 40-43 provides a detailed example illustrating the translation process.
LO 12-6 Make calculations and remeasure financial statements of a foreign subsidiary.
• Slides 45-52 explain the remeasurement process and how it differs from translation.
• Slide 53 summarizes creating a proof of remeasurement exchange gain or loss.
LO 12-7 Prepare consolidated financial statements including a foreign subsidiary after
remeasurement.
• Slides 57-61 modify the translation example to allow students to practice
remeasurement using a familiar fact pattern. By restating the same set of financial
statements using a different method, students can clearly see the differences between
translation and remeasurement. After completing this example, we often skip back to
the translation example so students can compare their answers to see the differences.
• Slides 62-66 provide a group exercise to practice creating a remeasurement schedule.
LO 12-8 Understand other issues related to foreign operations including the hedging of a net
investment in a foreign subsidiary.
• Slides 68-70 summarize the accounting for foreign investments in unconsolidated
subsidiaries.
• Slide 71 explains how the liquidation of a foreign investment occurs.
• Slide 72 briefly introduces hedging of a net investment in a foreign subsidiary.
• Slide 73 summarizes ASC 830 disclosure requirements.
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
• Finally, slides 74-80 summarize several additional considerations related to foreign
investments:
o Statement of cash flows
o Lower-of-cost-or-market inventory valuation
o Intercompany transactions
o Income taxes
o Translation when a third currency is the functional currency
TEACHING IDEAS
1. Students could be assigned to obtain recent import and export information for the United
States to determine the magnitude of this economic activity. For example, the following
question could be raised: What were the three most significant imports into the U.S.
during the last year? What were the three most significant exports out of the U.S. during
the last year? What are the amounts of these imports and exports, and what was the
balance of trade for the year? This information can be found in the Department of
Commerce's Survey of Current Business as well as a variety of other governmental
publications.
2. Students could be asked to select a company from a foreign country's listing in the
foreign edition of Moody's. For example, students could be assigned a country such as
France and asked to examine the financial reports of at least one company located in
France for differences in accounting or business operations from a typical U.S. company.
3. Students could be asked to examine the annual report of a selected Fortune 100 company
for an accumulated other comprehensive income--translation adjustment. What is the
amount of this adjustment and is it a debit or credit balance in the stockholders' equity
section of the balance sheet? The students could also be asked to examine the accounting
policies footnote of the company to determine if the company consolidates all, or just
some, of its foreign subsidiaries.
4. Students could be asked to investigate what progress the IASB and FASB have made in
developing convergent accounting standards. Students should access the FASB and IASB
Web sites at www.fasb.org and www.iasb.org.
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C12-1
LO 12-1
30 min.
E
Comparison of U.S. GAAP and IFRS
Students have to prepare a short paper defining the nature of the differences that
they find after going through a PricewaterhouseCoopers publication regarding the
differences between U.S GAAP and IFRS.
C12-2
LO 12-1
15 min.
E
Structure of the IASB
Students should gather inputs from the IASB Web site in order to briefly describe
the structure of the IASB.
C12-3
LO 12-1
20 min.
E
IASB Deliberations
Students should gather inputs from the IASB Web site regarding Current
Projects. They should be able to identify the projects currently on the active
agenda that are being addressed by the IASB, the timetable identified for
milestones on each of the projects, and also the status of the Conceptual
Framework project.
C12-4
LO 12-2
20 min.
E
Determining a Functional Currency
Students must determine the reporting currency, the functional currency, and the
process to be used for converting the financial statements for four independent
situations.
C12-5
LO 12-4,
LO 12-5,
LO 12-8
25 min.
M
Principles of Consolidating and Translating Foreign Accounts [AICPA
Adapted]
This case requires the specification of consolidation criteria for foreign
investments and the selection of appropriate exchange rates to translate selected
accounts of a foreign subsidiary.
C12-6
LO 12-2,
LO 12-4,
LO 12-5,
LO 12-6
20 min.
M
Translating and Remeasuring Financial Statements of Foreign Subsidiaries
[AICPA Adapted]
Students are asked to discuss the objectives of translation, the financial statement
effects of translation versus remeasurement, the factors to be used to determine
the functional currency, and the appropriate exchange rates for equipment,
accumulated depreciation, and depreciation expense under translation vs.
remeasurement.
C12-7
LO 12-5
25 min.
E
Translation Adjustment and Comprehensive Income
Students are asked to prepare the subsidiary’s dollar-stated statement of income,
statement of comprehensive income, and a year-end balance sheet. They should
also discuss the major differences between the one-statement format of the
Statement of Income and Comprehensive Income versus the two-statement
format of the Statement of Income with a separate Statement of Comprehensive
Income.
Chapter 12 - MULTINATIONAL ACCOUNTING: ISSUES IN FINANCIAL REPORTING AND
TRANSLATION OF FOREIGN ENTITY STATEMENTS
C12-8
LO 12-5
25 min.
M
Changes in the Cumulative Translation Adjustment Account
This case asks students to evaluate and assess the information presented in a
foreign currency translation footnote.
C12-9
LO 12-8
20 min.
M
Pros and Cons of Foreign Investment
This case asks students to examine the business and social dimensions of U.S.
companies moving production facilities outside the U.S.
C12-10
LO 12-2
25 min.
M
R
Determining an Entity’s Functional Currency
Students are to review the current authoritative accountant standards and based
on this authoritative literature they are to determine the functional currency for a
U.S. company’s Mexican subsidiary. Their findings regarding this issue must be
reported in a memorandum to the controller that includes references to the
authoritative literature.
C12-11
LO 12-5
25 min.
M
R
Accounting for the Translation Adjustment
Students are to review the current authoritative accountant standards. Based on
the findings students have to write a memo on the translation adjustment as a
result of the sale of a part of a company’s investment in a Spanish subsidiary.
Recommendations should be supported with citations and quotations from the
authoritative financial reporting standards.
E12-1
LO 12-4,
LO 12-6
30 min.
M
Multiple-Choice Questions on Translation and Remeasurement [AICPA
Adapted]
Seven multiple-choice questions requiring students to select the appropriate
answers first if the translation approach is used, and then, for the same factual
situations, the answer if remeasurement is used.
E12-2
LO 12-4,
LO 12-5
10 min.
E
Multiple-Choice Questions on Translation and Foreign Currency
Transactions [AICPA Adapted]
Six multiple-choice questions requiring students to select the appropriate answers
first when the LCU is the functional currency, and then, for the same factual
situations, when the U.S. dollar is the functional currency.
E12-3
LO 12-1,
LO 12-8
20 min.
E
Matching Terms
A list of twelve terms is presented which students must match with the
appropriate descriptions.
