Reading 10: Multinational Operations

Page No. 9718th Sep 2022Date//Reading0MultinationalOverseaspreationsM 11.1 : Transaction ExposureTransaction Exposure - Fx fluctuation GILTranslation Exposure - Fy GIL while Consoliditing InvestReporting CulrenySFAS 52 Defination+ groupsPresentationCurrency In which FS are madeCurreny (PC)Primary eco environment in which firm operatesFunctional Currency in which entity generate andlarrency (FC)expends Cash (it can be PC or LC)some subjectivityLocal Currency- Carrery in which CO. operate(CC)*Transaction ExposureImport and export denominated in overseas CurrenyTransact recordedatspot late on the date oftransa ction Page No. 98Date//IfExchRateAGILarerecognizedonsettlemendtdat=inspotratebettransactiondate&settlementdutSettlementRecord unrealizedafterBlsdateGLL atBIS dateAfatherGILwillberecordedatsettlement dateonSubsequentyr-GILarereportedonI/S(noto(1)AnalyticalIssue-IAS 21&FASB52bothreqtrans"GILtobereportedinV/S- IssueneitherstatewhereinIlsLopertingorfiron- Alternatives :Component ofoperatingIncome I Exp(within SGGA)Non -operatingInclexp(financingcost)Key =distortsComparisonofoperatingmarginsbet'companiosGIL depend upon-Cos.A/LthatisexposedtoFx RiskinvalueVSdomesticFXriskwireny Page No. 94Date//* ExposuresForeignCurrencyTransaction in FCExposureStrengthenesWeakensExport SaleAsset (AR)GainLossimport purchaseLiability (AP)LossGainExampleAusfirmsellgoods toanItalin firmfor10,000whenthe spot rateis $ 1-6per europayoccursin30dayswhentheeurohasdepto 1.5Sol B/SI/SAt transaction dateAt transaction dateCash0Rev$ 16,000Acc Receivables$ 16,000At Settlement dateAt settlement dateCash$ 15,000FXLoss(1000)Acc Receivables0Balance eachotherStockholder'sequityNet asset1000IRetainedearning(1000) Page No. 100Date//15ththeDecspotrate.Onforwhenis$10,000pereuro Pay"occurs in30daysonjanuary15thhasto$ isAtthewhen the curodepyr-endtheexchfatewas$ 1.56 per euroSol"BIS$ 1.561/5At Yr-end dateAt Yr-end dateCashOFx loss(400)Acc receivables$15,600EquityNet asset400Retained earnirg(Sool$1.5At Settlement dateAt settlementCash$ 15,000Fx loss(600)Acc receivables0Net asset600 = Retained earning (600) Page No. 101Date / /*11.2 MTranslationTranslationofForeign CurrencyfinancialStatements:Convertingtheaccounts of overseassubsidiariestoreportingscurrency.Three - step process :1. Identifysubsfunctional Currency2. Convert3. ConvertfolegincurrencyBalance into functionally CalmfunctionalCurrencybal to parentsreportingCurrencyusingclosing rates (if functionalI reportingCurrencies differFactors in deciding the functional Currency(AS 211. Currency that influences Sales price2. Currencyofthecountry whosecompetitiveforcesandregulation sdetermineSalepriceMost Imp3. Currency in whichfunds fromfinancingactivitiesaregenerated4.Currency in whichreceiptsfrom operating activitiesare retained5Subsiadly automyFinancingInvestingIf autonomy theoperatinglocal Curreny = FCparent Controlthis the PC=FC Page No. 102Date / /6. Main Currency that influences cost of production(labor ( materials t etc)7.Fiancing fromparent(reliance)toservicedebt8. Remittace9. TransactionsofCashFlow to parentwith parent.3 MethodLCFCPCLC # FC =PCTTemporalmethodtranslationaka. "Remeasurement"ofLCFCPCLC = FC # PLORCurrentrateoftranslationaka."Translation"Exch Rate DefinitionsICurrent Rate :sheet date (i.e Cls Rate)Foreign exch (FX) rate as of balance2Avg Rate :Avy FX over reporting period3HistoricalRate:FXlatethatexistedwhen a particul,actualtransactionoccurred. Page No. 103Date//Each transaction May have its own historical rateExample : Rate when Stock wasissuedIn Case FC $ LC E PC we use both methodsFCRPCLCFCNote:If a Subsi is oprerating in hyper inflationis consideredenvironment t the functional Pursencyandtobetheparentpresentationfullerythe temporal method is used inGRAPUnder IFRSSubsfinancialstat" are restatedforthen tran slatedusingthe(vitientinftation andrate methodM 11.3TemporalMethodAKA - Remeasurement + monetary /non - monetary methodViewstheoverseasoperation as an extension of theparent Co. activitiesAlltranslatedthatpreservethemeasurementbasesafter translation1Current Value2 Historic lost LIFO Recent RatePage No. 104Accumulated depHistoricalDate/BIS1/5 (Profit at mixMonetary Assets & LiabilitiesRevenues & Expense(cash (AR/ AP / STD / LTD )Average RateCurrent RateAll other Assets & Liability (Prepaid exp)COGS + Dep 4 Amort(PP& E). Intangibles Inv at CostHistorical lostHistorical lostResult16 sold formore7APICcash thanExch Rate growthGILMCompalCapitalStock+carlent RatetoCustenHistorical lostmetDiv = Historical Rate when declareTotal EquityTotal = Mixed lateMixed RateApplying Temporal Method-Ignor unrealizid gain an lossesof non monetary ALLIProducetopofBIS(totalassets)2Produce Shareholder'stoEquity & liability (Retainedearnings= play figure BensulethatB/S balancesLiability (current)A =LtECommon stock C Historic)RE BLiabilities + Equity 10!Page No. 105Date/lsof3DeriveNIfromreconciliationofretained earningsOp RLExN) BxDiv(x)Cls R/Ex- Step 24ProducetheI/SNetincome(NI)inthellswilldifferentfromNIinretained earningsSForce the Its NI to agree to the NI in theRE byadding a "Gain" or "loss"Inventory& CoGS ; TemporalInventory (Historic rate)BI + Purchase -E1 loGsFIFO = End inventory translated at relatively recent ratesLIFU = End inventory converted at older ratesAVCO = End inventory converted at avg exch rateBeg Period care is(OGSCurrent Rate / RecentRate is usedFIFOILIFO If at weight historic rate when the items assumedto have been Sold during the yr were acquiredAVOC 11 Weight Avy Exch Rate Page No. 10619th Sep 2022 MondayDate / /M 11.34 Current Rate MethodAKA TranslationViews the overseas operation as an invest"Sub is independentof the parentAll asset&Liabilities (i.e Net assets are exposed to exch late(Exch late GIL are unrealized and stored in equity (Vie00until the overseas operation is disposed ofCTR realized in Vs on disposal(umulative translation adjustment-B/S1/5Equity - Custom CurrentAll assets / LiabilitiesRev&ExpCurrent RateAug RateCapital Common Stock StockDiv = Historical Rate whenHistoricalRatedeclearedRIEAggregate stockholder'sAccumulated Avg ratesEquity at Current Rateso Bls can balanceCamulative FX GILPlug figureCa Total - Current Rate Page No. 107Date / /Applying CR MethodIConvert theIncome statement - all rev andexpare translatedto avgrate2Derivecls RIEOp R/EXNI (Step D)Div(x)C/S R/EX3ConverttheB/S-allassetsandliabilitiesaretranslatedatthe Current rate4BalancesheetwillnotBalanceThediffisthe translation orsForcetheBlstobalancebyincludingthe è adjinEquity(CTA)NotethatExch fateGILfortheperiodistheCTAEx:EndBalanceofCTA?BegCTAis$20tAsset1000Liabilities6000}Netasset400Common stax150Beg RIE150M50Div paid25 Page No. 108Date //A-L = Equity1000 - 600 =400CommonStock{150Beg RIE175RIE35020050CTA50Div(25)Equity400Cls R/E200TranslationGfortheperiod=so-20=30Exposure6 Temporal :=(cash +AR) - ( AP + Current debt + LID)Some assets are moneturalmust all liabilities are monetaryMostlycreateNet Bls liability.Current Rate :Asset - liability = Shareholder's equityMostlycreateNet Bls assetInsight : These aretheBlsaccountsthatarerateaffectedbythe currentforeachyearmethodgood02/02102asbiop allPage No.109Date / /AppreciatingDepreciatingMethodoverseasOverseasCurrencyCurrencyNet monetary assetTemporalGainlossNet assetCurrentGainLossNet monetary liabilitiesTemporalLossGainM.11.5 ExamplesFlex lo International 7 a us firm T has a subsidiary vibrantInc, located in the Country of martonia . Vibrantwas acquired by flexlo. on 31st dec' 2014 Flexloreporteds its financial results in us$ The courrencyof Martonia is loca (LC). - Vibrant's operationalfinancial & Invest decisions are made locallyinMartonia, although vibrant does rely on Flex.for It expertise$Exch Rate bet $ & LCLC31st Dec'-20140.50HR: End Inventory0.456031 Dec 2015 0.4545MR : Beg Invent0.5200Avg 20150.47.62Purchases where made evenlyHR : Equity0.50throughout the yrMR. PP&E0.4881 PoPage No. 110Date /VibrantB/SAssetLiability2014201520152015Cash ? -CR100100AP400500AR500650Current debtM100200Inv10001200NM -NRLTD1300ass950PP&E700900Total asset2,3002850Total libilities18001650d.ll.Equitfic2019NoDiv2015Common Stock400RRA700400R/E on 31st Dec 2014, weetsRIE100800Total equity5001200+ 1100+1650Total L&E23002850Vibrant US2015Rev5000COGS3300)GM1700other Exp(400)Dep(600)Net Iname700 Page No. 111Date / /Sol" Current Rate Methodils2015LCX D Rate$Sales50000.47622,381loGs(3300)0.4762(1571.5)Gross Profit1700-Rvy Rate809.5other exp(400)0.4762(190.5)Dep(600)0.4762(285.7)NI700333.3$ 0.4762W, Reconciliation of RIEuXD$op RIE100GivensoN)7000.4762333.3Div(0)Historic(o)Cls RIE800383.3B/S 20152015 LCXD2015 $AssetCash1000.454545.5C/SAR6500.4545295.4on(nut120020150.4545545.4DecPP&E9000.4545409.1Total assets28501245.50.4545 Page No. $2Date//2015 $2015 LCAP5000.4545227.3Current debt2000.4545CR90.9Long-term debt9500.4545431.8Total liability1650750.0Common stock40000.5200RIE800W,383.3CTAplug(37.9)Total Equity1200545.4Total ott L28500(295.4A LAlterativ = Asset - LiabilityNet asset = 1295.4 - 750= Net ALL= 545.9Translate with CR= 2850 -1650 XO 455Temporal Method= 545.7B/S Asset2015 LCXD2015 $Cash1000.4545 CR45.5AR6500.4545 CR295.4Invt12000.4560 HR547.2PP&E9000.4881 HR439.3Total asset28501327.4A - LMonetary Net assetNet asset = 1327.4 - 750Asset 750577.4 - EquityLMS (1650)( 900) Net liability Page No. 113Date / /Bls L+E22015 LCAX2015 $AP5000.4545CAR227.3Carrent debt2000.4545 CR0000 90.9Long -term debt9500.4545 (R431.8tota Liability1650oofs 750. 0Common stock400O.S HR200RLE800Plug377.9-Missing figureTotal equity1200 +1650577.4 + 750Total E+L28501327.4INW. Reconciliation of RLELCXA$Op RIE100Given50NI700Plug327Div(0)(0)Us RIE327.4T800we already have thisW2 TemporalCOGSLCAX$Beg Invt10000.52520Purchase Plug3500-Missing0.4762 Aug Rate1666-7End Invt(1200)0.4560(547.2)(UGS3300639 SElbeor useshouldat the historic late relatingtopurchases itincludes (FIFO UFO & ACVOweighted avg ifwill Impact)avail Page No. USDate//I/S 2015ItaitcXD$E.fssSaleP.O.50000.47620052381COGS(3300)W206/(16395)Gross profit170074.5other exp(400)0.4762(190.5)Dep(600)20.4881(292.9)NI700258.1RemeasurementGeiffaPlug69.3NI?.fssiW,327.4J+3CR Vs.CRTincome before translation GIL02333.3Translation GIL258-1-37.969.3onBISonNet Income333.3Total asset327.43/81295.31327.4Translation GIL :(A>L)Resultin:-(LosNet assetlossisexposed0depretatingECT:Net monetary(ML > MA)liabilityareP ResultsexposedinGrainin depretiating LCJipullliovoti I'llPage No. 115Date/1506as2NI :isdiffbecausediffexchrateusedtotranslateCOGS& Dep/ the allrecognizedintwomothodsareswreportedinFStagnogmaIIAdiffforffereSTotalAssets:i)3Invt & Net fixedassetarediffInt &CRCRfix assetTHR211M 116RatiosaigromMethodriptomtonParticularsTemporalCurrent Rate2)Monetary A/CCRCRlotoT\OTNon-monetary A/CHRCRCommon stockforHRHR sites windRevenuesARARNOhavidCOGSHRARDepHRARExposureNet Monetary assetNet assetExch rate GILllsEquityregroundsavdiffis Page No 1161Date/20th th Sep 2022ThuesdayPureRatios& MixedRatios VIMPPurells&BLSRatioAll Component of ratio fromB/S on t IlsUnaffected bytheuseofCurrent Rate methodBls -CRBoth numaratoris - ARand denominatorEx:IIS2014 LCCRTemporal34%347.31.17.Gross MarginNet marginbonto M14%14%13.87.star doneLonogmaTB/SLTD / Total Capital0.440.440.43 aCurrent Ratio2.792.79279 *Quick Ratio1.071.071.07Fixed asset turnover5.565.825.28Could differdueto ending InventoryMixed Ratios Bls 4 llsCombainesinputfrombothBls&IlsCurrentRatemethodsresultsin small changesinmixedratiobecauseNIDale almost translatedatdiff exch rate Page No. 117Date / /RatioswillChange-ThechangewilldependonrelationshipbettheexchrateofnumeratorandexchrateofdenominatorfrienExRatrosLCCurrent RateTemporalART7.698.18.1XA(nut RT2.752.93.0anAsset T101-81-8*1.8*ROE58.3%61-1%56.7%ROA24.6%25.77.24.7%1009mal:* Could diffuedue to assetsTranslatedRatiosis largerthanorginalBecausoFCisdepresultsinAREnd RatedubSummaryPureBIS& ItsRatiowillbesameas organif FCApreciateingthenmixedRatiowill beSmaller than organiIf FCdepthenratio willbemixeLarger thanorginalgat2RA 10 IN f!!Page No.18Date/*Current Rate Vs. LC RaticsNo changefromtranslationusingCurrent Rate methodforpureincomestatement4B/SMixed ratios are distortedFX Ratechangesaffectconsolidatedratiosevenwhenno' real"OEchange occursCompareTemporaltoCurrent RatePoint : TemporalVs.CurrentRatemoredifficulttoanalgzethanLCVsCurrentRateresultsBesttoanalyzeratiosindividuallyNumeratoranddenominatorwilllikely changetorby dffproportionsYor Jub :Determinewhetherratiowillbelargeorsmallergiven the choiceofaccountingmethodProcessStep1 ;LCappreciatingordepreciatingStep 2 : Examine numeratorTransaltedat which rate ? C CR or HR or AR)Will numeratorQbe larger or smaller Page No. 119Date / /Step 3: Examine denominatorSame as numeratorAAARStep 4: Determinetheimpactonratios2871Ex:Effect onFixedasset Tlowithappreciating LLARsale / FAHRI Cls RateLC Appreiating :EndRate>AvgRate > Beg Rate+Numerator (sales) - TranslatedatavgrateunderBothMethodDenominator (FA) - Temporal ; HRCurrent Rate : Closing RateFixed Asset Tloishigherunder temporalmethodifthehistoricrateislowerSummary of translation Gain / lossIMPFCBlsStrengthWeakensNet AssetPossitivetranslation adjNegative translation adjNet LiabilitiesNegative translation adjNegPositiveAL Page No. 120Date/M 11.7 : Hypertiflation:GAAP3 yr Cumulative Compouned inflation Rate> 100%(26: yrIFRS - No specific defination but agrees with GRAPIn hyperinflation using lue Current Rate methodresults in:lowerALLNon-monetary assets and liabilities : are not affected byhyperioflation C Disapproving plant)In hyperinflation, FC is not Consider in determingtheapplicabletranslationmethodGRAP -Temporal Method is Reg (FC = PC ) #LLIFRS -Foreign Currency statement are restated for infludeand then translatedat the Current exchRestating for Inflation (IFRS)lofationINon - Monetary assets & Liability :-CPlRestate using 9 pricefrom Acq date to Bls date.Revalued assets at indexed from date of revaluation Page No. 121Date//2Monetary ALL are NotRestatedv983Equity isindexrestated by multiplying thechangeinthefromthebegoftheperiod t ordateofContributioniflater,totheBlsdate14Rev & Exp are restated by multiplying the change intheindexfromthetransactiondatetotheBIS date.5A purchasing power gain orlossisrecognized in theItsbasedonthenetMonetaryassetorliability exposure,Net monetary asset exposure -lossNet Monetary liability exposure-GainNote : Bls = RE is Plug figureIls = Net purchasingpowerGIL in pluy figureEx: A sub was created on31stDec2014LCBtheCurrency of theCountryinwhichtheforeign subislocatedFinancialdatagives& below(in us)201520th2014200Cash50008000AP20,000 20,000Inventory25000 25 000Common stock10,00010,000QRIE03,000Total asset30,00033,000Total Ltd30,00033,000 Page No. 122Date //Price Incidices(in L(s)2015Rev15,00031st dec 2014100Exp(12,000)31 dec 2015150NI3000Aug 2015125Prepare inflution adjBLS&ilsforwasB/SSoln(In LC)2015Adj factorInflation adjustedCash80008000Inventory25,006150/10037500Total asset33,00045500AP2000020,000Stock NM10,000150/10015,000RIE3000Plug10500 :Total C+E33,00045,500I/Sberom export for practicle(in L(s)2015Adj factorleft adjustedRev15,000150/12518000150/12514400Exp(12000)Net purchasing powed gotsPlug6900asMI9A10500Beg RIE0NI B Plug10500Div(0)Eng R/E10500 Page No 123Date//Similarities of Methods :us GRAPIFRSTemporal MethodInflation Adj FlsMonetary AIL are exposed to Monetary All are exposedtochangeing exch rateRisk of inflationNet monetary liability exposureNet monetary liability exposurewhen foreign currency is depin hyper . infl will results inwill results in Gainpurchasing power gainGIL from changing exch ratePurchasing power gain or loss isis recognized in the I/Srecognized in the LlsDisclosuresUnderboth IFRS & GRAP :-Exch Rate diff in NI , Not leg to separate FC transactionGIL from GIL anising from temporal method in I/sTotal CTAEquity, aswell classified as a separate Component of shareholderasCamulativereconciliation of the ant oftranslationadj at the Beg 4 End of period Page No. 124Date / /SurplusCleanGIL which are reportedDirtyGll are included directdirectly in equity arein SH equity via CompanyInstead reported in NIIncomeEffects of TaxesM.1.8Earnings of Multinational company are sjub sbyjectedto multipletax jurisfriction ; hencetheStatutory tax.rateoften differs from the effective tax RedEffective tax Rate :- Tax exp (PBTStatutory tax Rate :- Tax late of the countryAccounting Standards require Companies to provide arecoraliation bet effective tax 4 statutary tax late.Orange in effective tax rate on ! account of foreignoperationcan be due toIchange in the mix of profits from differentCountry (with varying tax rate)2changesintaxrate Page No 125Date//Issue = transfer pricingShifting from high tax ratetolow tax rateCountriesvieintercompanytransactionCountries have laws to prevent aggressive transfer pricingPayment of domestic overseastax on income variesgloballyTaxtreaties prevent double taxation - cridit grantedfortheoverseastaxC us)Ex:ItemAMCOBIANCOStatutory tax Rate25%30%PermanentEffect of disallowed exp3>1.%diffEffect of exempt Income(2%)(0.5%)Effect of taxes in foreign IMP3.4%(1.22)jurisdrictionsaEffect of recognition of prior losses(3%)Effective taxrate28-6726.3%Sol" The effect of foreign operation resulted inanEffective tax for AMCO &11forBIANCOThey benefited from Foreignoperation in reducing tax CKP Page No. 125Date / /AnIncreaseinforeignoperationstotalrevenuewouldfatherreduceas a % ofBLANCO taxexp infuture4AMCO taxexpSustanibility ofSale Growthal]Organicgrowthinsales-onlyfromVolume 4 priveandexcluding affects of acyldivestituresandeffects) are usuallymoresustainable.currenlyz] Currencyeffectsonreportedrevenues distortSustaina blegrowthestimates.3] ManagementCaneffectVdume&pricebuthave noControl over exch rate.4] Currency effects can mean revert5AnalystsshouldremoveCurrencyeffectsforforecastingfuturea levCurreny%.S Sale excludingRegion% A SaleImpactCurrency effectsNA3%-2%5%Asia2%to%2%Eu2%3%-1% 85/Page No 127Date / /6] Companys often include disclosures aboult theeffect of the MD&A exch Sometime rates on in Sales Investor Presentation growthin or earning amnoustment both7] Consider effect of Sale growth for fore castingfuture performance and evaluating historical performanceEffect on financial Results.Currency value fluctuations : affects a companyreportedresults due toaTran saction exposerse } No requirement tob] Translation effects Separately discloseDisclosures may help analysts in determining theextent of Impact of currency effects on FISIFRS & GAAP disclouse:- Exch diff in V/S- CTA and re caraliation of opening & ds amtSensitivity analysis analysis on the effects of Currenyfluctuations