In the previous chapter, we looked at the accounting issues relating to transactions between a US company and a foreign company. When the transaction is denominated in US dollars, there really aren’t any new issues. However, when the transaction is denominated in a foreign currency, then the US company needs to determine the dollar equivalent of the transaction at various dates. In addition, the US company might seek to minimize the potential impact of changes in the foreign currency exchange rates by hedging.
In this chapter, we turn our attention to issues that a US company faces when it has an ownership interest in a foreign company. If the ownership interest is such that consolidation is required, two specific questions arise. First, what if the foreign subsidiary’s financial statements have not been prepared in accordance with US GAAP? Second, what if the foreign subsidiary’s financial statements are denominated in a currency other than the US dollar?
The answer to the first question is that the foreign subsidiary’s financial statements need to be recast to reflect US GAAP before they can be consolidated.
The answer to the second question is that the numbers in the foreign subsidiary’s financial statements need to be translated to US dollars. The translation of the foreign financial statements is the focus of Chapter 11. To learn more, go here.