mcgladrey case study presentation
TRANSCRIPT
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Le Pumps Case Study
Alex Koehler
Anita Sayyed
Ronald Honse Jr.
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Brief Explanation of Case
Ferguson (US)/Le Pumps (UK) Functional currency determination Necessary adjusting entries for consolidation
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Determination of Functional Currency
Functional Currency: “currency of the primary economic environment in which the entity operates” (ASC 830-10-45-2)
ASC 830-10-45-3 Le Pumps’ day-to-day operations not dependent on
economic environment of dollar Le Pumps’ cash flow can be converted into dollars and
paid back to parent company, Ferguson Functional currency: Pounds
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Determination of Functional Currency (Continued)
ASC 830-10-55-5
Economic Factors Functional CurrencyCash flows Pound
Sales price Pound
Sales market Pound
Expense Pound
Financing Dollar
Intra-entity and arrangements Pound
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Authoritative Support
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Topics
810 Consolidation
830 Foreign Currency Matters
323 Investments—Equity Method and Joint Ventures
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Purpose
ASC 810-10-10-1 “To present…the results of operations and
financial position of a parent and all its subsidiaries as if the consolidated group were a single economic entity.” For the benefit of owners and creditors of the
parent entity. Consolidated financial statements are more
meaningful than separate financial statements.
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Intra-Entity Transactions and Balances
ASC 810-10-45-1 Intra-Entity balances and transactions shall be
eliminated upon consolidation. Includes:
Intra-entity open account balances Intra-entity sales and purchasesIntra-entity profits and losses on assets
remaining within the consolidated group
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Translation Adjustments
ASC 830-30-45-12 Result from translating subsidiary’s functional
currency into the reporting currency. Not included in determining Net Income Reported in Other Comprehensive Income
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Recognition of Subsidiary’s Earnings
ASC 323-10-35-4 Investor shall recognize it’s share of the earnings
or losses of an investee in income. Investor’s share is based on the shares of
common stock and in-substance common stock held by the investor.
Le Pumps, Ltd –> wholly owned by Ferguson Pumps, Inc.
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Consolidation Process
ASSETS
LIABILITIES
Equity
ASSETS
LIABILITIES
EQUITY
-
=
Investment in Sub
ASSETS
LIABILITIES
EQUITY
FERGUSONS
CONSOLIDATED ENTITY
LEPUMPS
=+
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Steps to Consolidation
STEP 1: Inclusion of profits of Subsidiary in Parent’s income
A. Translation of investment Account.
B. Including income of LePumps Inc.
B1 Record translation gain on income
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Steps to Consolidation (Continued)
STEP 2: Elimination of subsidiary’s Equity
C. Elimination of Le Pumps Equity
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Consolidation Process
ASSETS
LIABILITIES
Equity
ASSETS
LIABILITIES
EQUITY
-
=
Investment in Sub
ASSETS
LIABILITIES
EQUITY
FERGUSONS
CONSOLIDATED ENTITY
LEPUMPS
=+
Purchases
Unrealized Profits
Sales
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Steps to Consolidation (Continued)
STEP 3: Elimination Of Intercompany TransactionsD. Elimination of unrealized profits
I. Elimination of Intercompany sales and purchases
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Consolidation Process
ASSETS
LIABILITIES
Equity
ASSETS
LIABILITIES
EQUITY
-
=
Investment in Sub
ASSETS
LIABILITIES
EQUITY
FERGUSONS
CONSOLIDATED ENTITY
LEPUMPS
=+
Intercompany
Receivable/ Payable
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Steps to Consolidation (Continued)
STEP 4: Elimination Of Intercompany BalancesE. Translation Gain/Loss on intercompany
receivable/payables
F. Elimination of Intercompany receivables
G. Long term Receivable/Payable translation gain/Loss
H. Elimination of long term receivable/ Payables
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Quick Recap of Case
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Loan forgiveness of $2000,000
Fergusons: Loss of $2000,000 in in P&L
LePumps:Loan recorded @ .6307GBP:$Loan forgiven @.614GBP:$gain of GBP 1,227,974 on loan forgiveness and a translation gain of GBP33,370. Both will be included in the profit for the year.
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Special Thanks to:
Mr. Guy M. Gross
Mr. Robert E. StoettnerPartners from McGladrey