I was going through the videos of Multinational opeartions and how to convert every element of B/S and I/S from functional currency of subsidiary to Parent’s presentation currency. Among other things, we also convert Inventories and COGS. Just wanted to know what an analyst should do when he is faced with a parent that uses FIFO method and a subsidiary that uses LIFO method or vice versa? Do they simply add the two numbers (assuming acquisition accounting method)
Also in the worked example of curriculum, i saw that they convert Inventories and COGS to parent’s functional currency without giving too much of a thought to the Inventory flow method at all. They just use the figure in the subsidiary’s B/S and convert it to Parent’s presentation currency using the average exchange rate. Not taking into consideration, the inventory method of sub. Atleast that was not discussed in the videos i am using. Can anyone help?? I think I’m missing something here.
Do you think the average translation rate should be used for both Inventory and COGS under both the methods i.e. Current and Temporal? and that average exchange rate should be same for LIFO and FIFO both?? Inventory is translated in current method using current rate … do you think that is the appropriate rate for both FIFO and LIFO?? Actually i’ve asked you so many questions … lol
For your first question: although it is out of the scope of CFA Curriculum readings, during translations, the inventory of the subsidiary is always converted into the parent’s inventory method denominated in the foreign currency first, and then translated into the presentation currency with applicable rates.
Second Question: Its mentioned in the CFAI curriculum that when LIFO is follwed, Earlier exchange rates will be applied since the inventory consists of older stocks and when FIFO is followwed, Later exchange rates will be followed since the inventory will consist of newer stock.
Average rates are used for inventory just for the illustrative purposes, eventhough thats not the practice.
. Oh yeah, 2012 was not the end of the world. Atleast not for us