Geocorp is a global corporation with operations in North America, Asia, and Europe. Its primary business is marketing industrial machinery for the construction industry. Geocorp has regional headquarters located in New York, Tokyo, and Paris. All North American and U.S operations report to its regional and world headquarters located in New York, while all Asian operations report to Tokyo, and all European operations report to Paris.
The following information is relevant to Geocorp’s subsidiaries:
- Geocorp has a Canadian subsidiary that reports its results in Canadian dollars (CAD). The CAD is the functional currency.
- All domestic U.S. operations report their results in U.S. dollars (USD).
- All world-wide operations are reported in USD.
- Geocorp’s Asian operations report their results in Japanese yen (JPY). The JPY is the functional currency.
- Geocorp has a Chinese subsidiary that reports its results in Chinese yuan renminbi (CNY). The USD is the functional currency.
- Geocorp’s European headquarters (in Paris) operations report their results in euros (EUR). The EUR is the functional currency.
- Geocorp has a British subsidiary that reports its results in British pounds (GBP). The USD is the functional currency.
The following table is a summary of selected financial results from Geocorp’s foreign operations:
All values are in millions
CAD
JPY
CNY
GBP
EUR
Revenues
50
5,000
250
150
700
Cost of goods sold (COGS)
20
2,700
110
100
480
Gross profit
30
2,300
140
50
220
Selling, general & administrative (SGA) expenses
18
1,000
52
29
200
EBIT
12
1,300
88
21
10
Cash
35
4,200
130
102
400
Accounts receivable
12
1,400
55
45
170
Inventory
20
3,900
135
123
300
Fixed assets
62
7,680
188
370
450
Accounts payable
27
3,300
76
68
350
Long-term debt
70
8,450
290
320
550
Common stock
10
2,000
150
50
350
The following exchange rates apply (USD per foreign currency unit):
Currency
Historical Rate
Average Rate
December 31, 2002
CAD
USD 0.7013
USD 0.6803
USD 0.6592
JPY
USD 0.0094
USD 0.0088
USD 0.0082
CNY
USD 0.1010
USD 0.1109
USD 0.1208
EUR
USD 0.9801
USD 1.0318
USD 1.0834
GBP
USD 1.4803
USD 1.5506
USD 1.6209
With respect to the British subsidiary, what method should be used to value its fixed assets, what is the appropriate exchange rate, and what is the translated value (USD)? A) Current method, current rate, USD 599.7 million. B) Current method, historical rate, USD 547.7 million. C) Temporal method, historical rate, USD 547.7 million. Correct Answer is C, I can’t understand the explanation that Self-contained, independent subsidiaries reporting their results in the local currency that is NOT the functional currency use the temporal method. Fixed assets under the temporal method are translated using the historical rate. Hence, 370 × 1.4803 = USD 547.7 million. Appreciate your help… Thanks a lot…