Running Head: MEMO i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 1
To: ABC
From: XYZ
Date: August 05, 2022
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
MEMO i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 2
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 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 the
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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
