Report for Management – Foreign Currency Risk
XYZ, Inc. is a U.S.-based company in the process of acquiring a subsidiary in a country whose functional currency is not the U.S. dollar. Use the report template, located in the online course shell, to create a report for management that details the risks involved in operating a subsidiary in a functional currency with the U.S. dollar as the reporting currency.
Note: You may create and / or make all necessary assumptions needed for the completion of this assignment.
Write a four to five (4-5) page report in which you:
1.Specify the potential foreign subsidiarys business operation, the functional currency used, and the type of intercompany transactions anticipated between the acquiring company and the potential subsidiary. Describe the two (2) major financial statement translation methods currently used in US GAAP (i.e., the current rate method and the temporal method). Determine the major procedural differences inherent in applying each method. Analyze the fundamental manner in which balance sheet exposure differs under the two (2) methods in question.
2.Compare and contrast the effects on income that result from the use of both the current rate method and the temporal method to translate cost of goods sold. Determine the key inherent risks and discuss the related impact on the investors from the use of each method in question.
3.Suggest one (1) strategy for determining and disclosing a translation adjustment when parent company management has translated the financial statements of a foreign subsidiary into its reporting currency. Determine the main steps that you would take in order to determine a translation adjustment, and indicate the places within the financial statements where you would report the amount of the translation adjustment in question.
4. Recommend one (1) way by which to translate the subsidiarys financial statements. Include consideration of the foreign exchange risk within your recommendation. Provide a rationale for your response.
5. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.
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