Question

Simms Corp. controlled four domestic subsidiaries and one foreign subsidiary. Prior to the current year, Simms Corp. had excluded the foreign subsidiary from consolidation. During the current year, the foreign subsidiary was included in the financial statements. How should this change in accounting entity be reflected in the financial statements?

Answer 1

While consolidating foreign subsidiary,, the golden rule is to arrive at the correct amount for each line item which needs to be included in Balance Sheet.

FAS 52 states the rule for consolidation of foreign Subsidiary. Step 1 is to determine the functional currency.. The functional currency is the currency in which the bulk of the business activities of the entity are carried out. In the case of the Simms Corp., let us assume that Subsy keeps its books in INR but conducts its business in US$. So now we are faced with a set up in which an Indian subsidiary of a company has a home currency (Rupees) that differs from its functional currency (Dollars)

2. Next step is to determine if the functional currency is also the home currency.

a. If the functional currency is the home currency of the subsidiary, one uses the current method to find the correct multipliers.

b. If the functional currency is not the home currency of the subsidiary, one uses the temporal or historical method to find the correct multipliers.

If the current method applies

a. All assets and liabilities: current (spot) rate on closing date.

b. All equity items:

i. equity items other than retained earnings: spot rates on transaction dates, i.e. specific identification.

ii. for retained earnings, translate layers as follows

1. Share of pre-control R/E: specific identification (the spot rate on purchase date*)

2. Additional layers: weighted average rate for the relevant year except for items identifiable with specific dates.

3. Retained earnings components identifiable with specific dates (including dividends): specific identification.

c. Income statement items: specific identification where practicable, else average rate for the period.

If the Temporal method applies

a. All monetary assets and liabilities: current (spot) rate on closing date. All other assets specific identification (use control date for pre-control assets).

b. All equity items (same as of current method)

c. Income statement items: specific identification for items with identifiable acquisition dates