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To convertis to engage in a transaction in which an asset or liability originally measured in one currency is physically exchanged for an asset or liability measured in another currency. Exchanging pounds sterling for dollars in the foreign exchange market is converting sterling into dollars. Swapping yen-denominated debt for dollar-denominated debt is converting the debt from one currency to another. 11-3. The Central Problem. What is the central problem involved in consolidating the financial statements of a foreign subsidiary? The central problem arises from the fact that exchange rates change from one time period to another, combined with the accounting tradition that accounts are supposed to be kept on an historic cost basis. The value in the parent’s home currency of assets and liabilities measured on an historic cost basis in a foreign currency is not clear if the exchange rate has changed. Different countries have different rules on how to treat the discrepancy that arises when exchange rates change. 11-4. Self-Sustaining Subsidiaries. What is the difference between a self-sustaining foreign subsidiaryand an integrated foreign subsidiary? A self-sustaining foreign subsidiary is an entity that operates in the local economy more or less independently of its parent. To a large degree its operations, including purchasing, production, and sales, are tied into the local economy; and the entity could probably operate on its own without foreign parent ownership. An example would be the operations of Shell Petroleum in the United States; although owned by a Dutch-British parent, the U.S. operations of Shell in refining and transporting stand pretty much on their own. (Most of Shell’s petroleum stations in the United States are owned by local operators.)
Eiteman/Stonehill/Moffett • Multinational Business Finance, Thirteenth Edition 50An integratedforeign subsidiary is one that operates as an extension of the parent’s operations, with cash flows and general business lines highly integrated into those of the parent. An example would be a Ford