Consolidating Foreign Subsidiary Financial Statements - Research Paper Example

Consolidating U.S. and Foreign Subsidiary Financial ments Introduction Companies are supposed to adopt integrated approaches to build a strong framework with IFRs. To b in a position to achieve this, they require to be having a fully a solution that fully integrated that should be ideal to support the adoption of IFRs. Adoption of both IFRs and VAS calls for technical, operational and strategic changes. It also comes with unavoidable effects on a company’s IT. It might also affect the management and reports of many business activities. Thus, companies have the obligation of employing some methodical approaches if they are to build the IFRs framework. Is Consolidating U.S. and Foreign-based Financial Statements Hides Useful Information? The author makes a conclusion that consolidating U.S. and foreign-based financial statements withholds some information to both the public and their foreign counterparts. This is evident in many situations within their many business transactions and statements. The first case where crucial information about financial statements is masked is while translating foreign currency. According to the author, the literature that shows foreign currency translation is usually categorized into four groups. The first group shows surveys issues related to the many changes that occur in the management behavior. The second, on the other hand researches on effects that come after using alternative methods of translating financial statements. The third literature is one which studies the market and the many emerging behaviors related to market patterns, and the final study reveals different preferences that are used as translating methods, this is done by making early adoption and embracing SFAS. However, studies that are made in the first category, a study were conducted on almost 70 Multinational Companies from different parts of USA. It was found out that that most management of these companies were not speculative and were very defensive as far as rate variations were concerned and were not willing to give comprehensive reports about their translational losses. It seems like these managements felt more insecure by giving out real financial statements about their standing financial status (Rodriguez 70). In respect to this, they were ready to pay big costs which would be much higher than the existing average exchange depreciation. Houston in a different report states that managements of MNCs tend to decrease their financial exposure as they adopt SFAS # 52 (Houston 52). They have been very unpleased with the newly passed translational rules as they advocate for financial openness and transparency (Choi 54). This is a clear indication that most Multinational Companies to a greater extent hide some important financial information that relates to their current financial status. Example 2: If there exists a foreign debt to equity ratio of 5 in the US and the parent company’s ratio is 1.25, the two of them shows different market positions at different time. Though the ratios seem vastly different from one another, it may be said that they are healthy. This is always in reference to the environment at that particular period of time. This consolidated ratio however, is given to be 2. Practically, this number is too low for a good financial environment and it can be said to be extremely high in USA. Thus, the consolidated debt in elation to prevailing equity ratio does not give us the reality in the two environments. It is clear that it contains very little and insignificant knowledge, which in fact, might be misleading. The only best way that can be employed to clearly interpreted and analyze this debt to equity ratio is through disaggregate, which means, consolidating, and later interpreting separate numbers in respect to particular environments (Rodriguez 92). In a nutshell, consolidating US and foreign financial statements masks some of its important information. This has been proved to be true by the many cases where transparent in as far as release of financial reports is concerned. They have continuously withheld bits of their very sensitive information though these foreign subsidiaries are their business partners. Is convergence to IFRS addresses the author’s concerns? According to me, convergence of international financial organizations through consolidation does not solve the issue of lack of transparency and openness as far as reporting of their financial statements is concerned. The article doe not clearly point out how after consolidation confidential information is released to international bodies that control finances in the world. It is stated that a lot of crucial information is even damaged than retrieved when particular translated accounts get consolidated with other parent accounts. The currency that is translated is not equal to dollar measures without consideration how the transaction is done. Taking cash account as an example, there is no controversies as to how cash account is to be translated (according to exchange rate documented on the balance sheet). Even the cash account is sometimes distorted while translating and consolidating. Exchange rates are the rates at which conversion of one currency to another is done (Holt 13). These rates do not, whatsoever, guarantee traders the same ripe financial goods and services that are available in USA which can be available in the market for purchase in the foreign market using the price that is indicated by the prevailing exchange rate, or for this case, at any particular market price. Moreover, various relationships about financial statements are fundamental in foreign environment. The relationships are also meaningful in the United States of America and are forced together artificially in the process of consolidation so that the final number does not make any sense in the two environments (Holt 5). Thus it can be said that convergence of IFRs has proved not to prove the many problems that come with consolidation of companies. The major challenge in this case, being withholding crucial information about a company. Coming together of IFRs was seen as a move to solving the problem that has existed for years of giving incorrect accounts of financial undertakings or totally keeping some or the full information. Does the U.S. and the International community need to reconsider the role of consolidated financial statements? I feel so. The US government and international bodies that regulate business undertakings has a duty to review the role that is played by consolidated financial statements. These statements should serve as a platform to discover a company’s weak joints and put the necessary measures to heal the wounds. However, most international consolidated organizations have failed to give these statements the weight they deserve by being reluctant in giving their true financial records. This denies their foreign counterparts to collectively find best ways of solving financial problems encountered on the way. The author argues that does not suggest that that results found after operations have been done on financial status of foreign operations ought to be ignored when giving a financial report. Many companies in US conduct several important operations in foreign markets and the financial information that is collected maybe of very great use to some users of financial statements. Thus, instead for destroying very important information through translation and consolidation, accountants should take the initiatives of presenting data from foreign environment into schedules that are neither supplemental nor translated in annual reports of a parent company (Choi 19). Consolidated financial statements should act as the companies’ baseline to assist them in coming up with ways and mechanisms of solving financial constrains that they undergo. At least, a list of all subsidiaries should be part of the annual report together with the total percentage of all owners in each one of them. This would go many miles in making a company even stronger than one which is not consolidated. In addition, consolidated financial statements from a parent company must reflect interests of the majority ownership. Instead of a company presenting the ownership in a much consolidated form, the objectives of financial reporting can be achieved better when equity method of presentation of investments which are in subsidiary, interests of the majority in as far as earning the subsidiary is concerned and dividend that come along with the subsidiaries from the parent company (Mueller 53).Thus, the international community and bodies controlling international trade should play a major part in negotiations to reconsider the role that consolidated financial statements should play as far as international trade is concerned. What Alternative must be put in Place? The research revolves around finding out whether consolidating financial institutions with those found in other parts of the world hides some information. This can be seen to be true as they seem to keep some financial records for themselves and do not present it as they present their financial statements. This can be seen as one of the major challenges that may be attributed to the continued lack of cooperation and togetherness with their foreign counterparts. It would be wise if multilateral companies should realize how giving total consolidated financial reports should earn them a lot as far as solving of financial constrains is concerned. The problem is best solved when its cause is known. If the MNCs fail to give information pertaining to this, it means that it has failed the first step of solving its financial problems. Bodies that control international trade should also intervene by coming up with ways and mechanisms of putting fines to companies and other organizations that fail to give total financial statements concerning their consolidated financial statements as it is a legal requirement. This is in efforts of enhancing transparency and openness to consolidated banks. Conclusion It is known that most projects fail due to lack of good communication or lack of sufficient information. A company should look for mechanisms to solve its problems through proper communication and giving true information about its undertakings. When a company makes an effort in giving its financial reports to foreign markets it is laying grounds to getting foreign partners to do business with. It is also a way proving confidence in its activities. It is a sign of success and commitment in which the company has in an effort to find foreign partners to consolidate. This process may not be simple but once a deal has agreed on and signed, the rail becomes laid. Consolidating of US and foreign financial statement have proved to be a big milestone in providing relevant financial information to both the United States of America and foreign nations getting consolidated with. This information gives a nation a chance to investigate on the country’s financial position and capability in relation to its currency. Consolidation, in the last couple of years, has become very common and more and more nations are getting into it (Rodriguez 80). This has been catalyzed by the fact that the business practice has proved to be very profit making and a way of promoting international peace and stability. Therefore, it can be stated boldly that, consolidated foreign operations with companies in the US provides relevant information for all the stakeholders involved. Works Cited Aron, P. H. Japanese Research. New York: DAIWA Securities America, Inc.1989. Print. Choi, F. D. S., and Mueller, G. G. International accounting. New York: Prentice Hall, New York, 1992. Print. "Holt, P. E. (2004) A case against the consolidation of foreign subsidiariesa€™ and a United States parenta€™s financial statements.pdf." MediaFire - Space for your documents, photos, videos, and music.. N.p., n.d. Web. 1 May 2013. . Lorensen, L. Reporting foreign operations of U.S. companies in U.S. dollars. New York: AICPA, 1972. Print. Iqbal, M. Z. International accounting Cincinnati: South-Western, 2002. Print. Rodriguez, R. M.). Foreign exchange management in US multinationals. Lexington: McGraw-Hill, 1980. Print. Mueller, et al. (1994). Accounting: An international perspective Irwin: Burr Ridge, 1994. Print. Read More