Learning Objectives

When a U.S. multinational company prepares its financial statements for reporting to its stockholders, it must prepare the statements according to U.S. GAAP and measured in U.S. dollars. These foreign operations may be subsidiaries, branches, or investments of the U.S. company. This chapter presents the current efforts to develop a global set of high-quality accounting standards and the translation of the financial statements of a foreign business entity into U.S. dollars.

Differences in accounting standards across countries and jurisdictions can cause significant difficulties for multinational firms. Some of the challenges multinational companies face include the preparation of financial statements according to the differing standards in countries where their subsidiaries are located and subsequent consolidation of the financial statements. These and significant other problems that result from differences in accounting standards are generating significant interest in the potential to converge accounting standards globally.

Accountants preparing financial statements must consider both the differences in accounting principles and the differences in currencies used to measure the foreign entity's operations. Restatement into U.S. dollars is necessary before the statements can be combined or consolidated with the U.S. company statements, which are already reported in dollars. For example, a British subsidiary of a U.S. company provides the parent statements measured in British pounds sterling, using the British system of accounting. The U.S. parent company must typically perform the following steps in the translation and consolidation of the British subsidiary:

1. Receive the British subsidiary's financial statements, which are reported in pounds sterling.
2. Restate the statements to conform to U.S. GAAP.
3. Translate the statements measured in pounds sterling into their equivalent U.S. dollar amounts. Each foreign entity account balance must be individually translated into its U.S. dollar equivalent, as follows:

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4. Consolidate the translated subsidiary's accounts, which are now measured in dollars, with the parent company's accounts.