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Subject: Acquisition of Stargell Corp. by Posey Co.
The US dollar-based company Posey has acquired Stargell Corporation. The Stargell
Corporation is a foreign subsidiary using non-functional currency. In order to prepare a
consolidated financial statement, it is important to include certain financial calculations that
reflect the merging of the parent company and the subsidiary company. Moreover, the
financial statements of the foreign subsidiary company need to be translated into the reporting
currency used by the parent company (Bragg, 2022). In consolidated financial statements, all
the financial accounting functions need to be combined and integrated in order to ensure
consolidation of the income statement, balance sheet, and cash flow statement. For the
translation of the currency, two methods can be used. It includes the temporal method and the
current rate method. The current rate method is used for translating the self-sustaining
operations. The temporal method is used for translating the integrated operations. This
method is generally used when the parent company and subsidiary company use different
currencies. Apart from the current rate and temporal translation methods, it is also important
to identify the four non-controlling interest figures and add them to the consolidation process.
The exchange rate may vary on the basis of the account type. The section of stockholder’s
equity present on the consolidated worksheet makes use of the historical exchange rates. In
case the conversion of the financial statements of the foreign subsidiary into the parent
company’s reporting currency results in translation adjustment, the loss or profit is to be
reported in other comprehensive income.
The consolidated financial statements are to be prepared on an annual basis. The
filling criteria depend on the ownership level that the parent company has on the subsidiary
company. The process can be broken down into a number of steps. The first step includes the
collection of the individual financial statement of the parent company as well as the foreign
subsidiary company. In the second step, the fair value of the net assets of the foreign
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subsidiary company and the value of consideration transferred is identified. The subsidiary
books are brough back to fair value. This is done by passing the consolidation entries in order
to create an investment in the account of the subsidiary company.
In the third step, the investment present in the foreign subsidiary account, as well as
the equity accounts, are removed. It is done as they already appear in the financial statement
of the parent company. In the fourth step, the potential group transactions are properly
adjusted. It may include the gains in the inventory or loans made by both the parent company
and the financial subsidiary. In the fifth step, the consolidated net income, as well as the net
income of non-controlling interest, is calculated. The calculation is then used in order to work
out the non-controlling interest and consolidated retained earnings. In the sixth step, the
equity accounts and the individual book values of the liabilities, as well as assets, are
integrated. The consolidated balance sheet account is prepared through the elimination and
adjustment of the entries.
For the preparation of the consolidated financial statements, the Accounting Standards
Codification 830-230can provide the translation directions on the basis of functional
currency.
Statement of Cash flow
In order to show the statement of cash flow, two methods can be used. It includes the
indirect method and the direct method. In the direct method, the company has to reflect all the
information relating to current cash flow that is directly associated with different items
responsible for triggering cash flows. It includes the cash paid by the customers of the
company, interest paid, interest income, cash paid to the suppliers and customers, as well as
dividends received.
The indirect method includes the reporting of the net loss or net income on the income
statement of the company. Then a number of adjustments are to be made in order to arrive at
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the EBITDA from operating activities or net cash provided. The adjustments that are to be
made include loss or gain on sales of assets, amortization, depreciation, change in payables,
and change in receivables.
In order to prepare the statement of cash flows, it is important to ensure that the
foreign currency cash flows are stated in the reporting currency. It includes a number of steps.
In the first step, the individual statement of cash flow is prepared for the parent company as
well as the foreign subsidiary. In the second step, the suitable exchange rate is identified. For
the purpose of calculation, the weighted average exchange rate can be used in the reporting
period. In the third step, the individual cash flow statements of all the companies, which
include the foreign subsidiary and the parent company, are combined. It results in the creation
of the consolidated statement of cash flows, which includes the accounts payables, account
receivables, and other important items.
References
Bragg, S. (2022, March 22). Foreign currency translation definition. AccountingTools.
Retrieved August 5, 2022, from https://www.accountingtools.com/articles/foreign-
currency-translation.html
