Question

Flowers Inc. an American company has two overseas subsidiaries located in Great Britain (Roses PLC) and in Holland (Tulips Inc.). Flowers prepares consolidated financial statements. The reporting currency is the U.S. dollar. Most of Roses operations and sales take place in Britain, and the transactions are denominated in the British pound. Additionally, Roses makes its own financing and operating decisions, independently of Flowers Inc. Tulip Inc. is a sales outlet for Roses PLC and operating decisions are made by the British subsidiary, Roses. a. Identify the method(s) Flowers Inc. should use to convert the financial results of Roses PLC into the U.S. dollar for purposes of consolidation. b. Identify the method(s) Flowers Inc. should use to convert the financial results of Tulip Inc. into the U.S. dollar for purposes of consolidation. c. Explain how a decline in the value of the British pound relative to the U.S. dollar will affect Flowers' earnings in the reporting currency.

Answer 1

There are two methods for currency translation, the current-rate method and the temporal method. The temporal method is used to translate integrated operations and the current-rate method is used to translate self-sustaining operations.

a). Since the operation of Roses Plc are independent of Flowers Inc, current rate method shall be used to convert financial results of Roses Plc in to USD for consolidation

b) Since the operation of Tulip Inc are independent of Flowers Inc, current rate method shall be used to convert financial results of Roses Plc in to USD for consolidation

c) In case of decline in value of British Pound vis-a-vis USD, Flower's consolidated earning would be negatively impacted.

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