Chapter 13 CHAPTER THIRTEEN--THE TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN AFFILIATES I. ACCOUNTING FOR OPERATIONS IN FOREIGN COUNTRIES A. A U.S. firm may maintain branch offices or hold equity interests in companies that are domiciled in foreign countries. As a general rule, a foreign subsidiary is consolidated if the parent company owns, directly or indirectly, a controlling interest in the voting stock of the subsidiary or otherwise exercises the ability to control the activities of the subsidiary. B. The exceptions to the general rule are as follows: 1. Control does not rest with the majority owner – e.g. as when the firm is in bankruptcy. 2. A foreign company is domiciled in a country with foreign exchange restrictions, controls, or governmentally imposed uncertainties that cast significant doubt on the parent’s ability to control the subsidiary. . II. TRANSLATING FINANCIAL STATEMENTS OF FOREIGN AFFILIATES A. A U.S. company maintaining a branch office in a foreign country or holding an equity interest in a foreign company must convert the account data expressed in a foreign currency into dollars before the financial statements can be combined or consolidated. Furthermore, if the equity method of accounting is used to account for an investment in a foreign investee company, the financial statements of the affiliate must be converted into dollars before the investor's share of the investee's reported net income or loss is properly determinable. B. In the process of translation, all accounts of the foreign entity stated in units of foreign currency are converted into the reporting currency by multiplying the foreign currency amounts by an exchange rate. 1. The current exchange rate is the spot rate in effect at the end of the accounting period (i.e., the balance sheet date). 2. The historical exchange rate is the spot rate in effect on the date a transaction takes place.