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Chapter 5
and profitability, account balances for each entity must be compiled and forwarded to the
home office so consolidated financial statements and reports for the company as a whole
can be generated.
You might think this would be merely an arithmetic problem: add up cash for all the
entities, accounts receivables for all the entities, and so on through the accounts. The job,
however, is more difficult than that. Problems can arise due to a variety of issues,
including the following: Accounts stated in another country’s currency must be converted
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to U.S. dollars (in the case of a U.S. parent company), and transactions between a
company and its subsidiaries must be eliminated from the accounts.

Currency Translation
The following scenario illustrates the problems of currency translation, which is the
process of converting account balances expressed in one currency into balances expressed
in another currency. Assume one euro is worth $1.25 (US), and a company’s European
subsidiary reports cash of 1 million euros at the end of the year. When the European
subsidiary’s balances are consolidated with those of the U.S. parent company at the end of
the year, $1,250,000 will be recorded. The same sort of translation would be done for all
the European subsidiary’s accounts. A complicating factor is that exchange rates fluctuate
daily; however, an ERP system can be configured to access daily exchange rates and
translate daily transactions automatically.

ANOTHER LOOK

International Financial Reporting Standards (IFRS)
The current reporting standard for financial statements in the United States is U.S.
GAAP (Generally Accepted Accounting Principles), created by the Financial Accounting
Standards Board. Governing bodies, such as the SEC, require companies trading on U.S.
stock exchanges to report their finances using the U.S. GAAP reporting standard.
However, in an effort to achieve a worldwide standard in accounting, by 2016 publicly
traded U.S. companies are likely to be required to report their financial statements
under a set of standards called the International Financial Reporting Standards (IFRS),
which are a set of international accounting standards issued by the International
Accounting Standards Board (IASB). A single set of reporting standards is important to
U.S. investors because many large companies in the United States, such as Intel, Coca-
Cola, and McDonalds, generate more than one-half of their income from outside the
United States. In addition, many investors are now investing in companies worldwide
and are interested in comparing financial statements across countries. More foreign
companies are also merging with those in other countries, which provides another
incentive for countries worldwide to move to a common reporting standard.
Previously, foreign companies trading on U.S. stock exchanges were required by the
SEC to report their finances in U.S. GAAP or to provide a translation between IFRS and
U.S. GAAP; the SEC now allows those companies to report only using IFRS. Recently,
the FASB and the IASB have been working on making the two standards, IFRS and U.S.
GAAP, closer. This work is known as convergence, because it involves eliminating
(continued)

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