ABC Corp, a public limited company, operates in the energy and power sector. The company has experienced significant growth in recent years and has expanded its operation internationally by the acquisition of overseas subsidiaries. Group policy is to translate the financial statements of these subsidiaries using the closing rate method with goodwill calculated at the rate of exchange ruling at the date of acquisition. One of these subsidiaries, XYZ, is incorporated in a country that is suffering from a very high inflation (120% over the last 3 years) as a result of political and economic problems. Additionally, it is difficult to repatriate funds from the country. ABC Corp owned 91% of the shares of XYZ, with the foreign government owning the balance. Most of the products produced by XYZ are sold locally, but approximately 10 % of the product sold at cost to ABC. Because of a dispute XYZ has created a provision for doubtful debt against an intercompany amount owing from ABC. As a part of its risk management policies, ABC hedges the profit made by XYZ and denominates XYZ’s Financial Statements in US $ rather than the local currency. XYZ non-current assets are carried at a US dollar valuation, which is prepared by the chief accountant. Discuss and Comment the treatment by ABC Corp.
ABC Corp, a public limited company, operates in the energy and power sector. The company
has experienced significant growth in recent years and has expanded its operation
internationally by the acquisition of overseas subsidiaries. Group policy is to translate the
financial statements of these subsidiaries using the closing rate method with
calculated at the rate of exchange ruling at the date of acquisition.
One of these subsidiaries, XYZ, is incorporated in a country that is suffering from a very high
inflation (120% over the last 3 years) as a result of political and economic problems.
Additionally, it is difficult to repatriate funds from the country. ABC Corp owned 91% of the
shares of XYZ, with the foreign government owning the balance. Most of the products
produced by XYZ are sold locally, but approximately 10 % of the product sold at cost to ABC.
Because of a dispute XYZ has created a provision for doubtful debt against an intercompany
amount owing from ABC. As a part of its risk management policies, ABC hedges the profit
made by XYZ and denominates XYZ’s Financial Statements in US $ rather than the local
currency. XYZ non-current assets are carried at a US dollar valuation, which is prepared by the
chief accountant.
Discuss and Comment the treatment by ABC Corp.
Step by step
Solved in 2 steps
