Multinational Operations..

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…

Here is a mind map for translations

local=functional> C >presentation local> T >functional=presentation local> T >functional> C >presentation

Consider the case of British subsidiary. Local=GBP, functional=USD (given), presentation=EUR (reports to Paris). So we follow 3rd route. Without even further ado you can pick answer C) Temporal.

Thanks a lot for your quick response, I can understand from this nice mindmap that if we want to translate the reportings we use Temporal Method, however if we want to transalte to their headquarter we will use Current Method, Is this correct…??

Yes. The subsidiary prepares FS using temporal and sends to headquarter. When the headquarter consolidates their FS they will use current method.

Perfect… Thanks a lot Krokodilizm… :)))