Consolidated Financial Statement Preparation Considerations
Prepared for Oprah Hill, President of SSI
Prepared by Tarun Sinha, partner, assurance, of Krishna Associations, CGAs
September 30, 20X0
This report will identify the adjustments that will need to be considered in order to prepare the consolidated financial statements for Sterling Shoes Inc. (SSI) and Footsie Inc. (Footsie)
Financial Accounting Issues
The acquisition cost in all the common shares of Footsie, for a cash consideration of $8,000,000, resulted in a discrepancy of $700,000 in the book value ($800,000) and the Fair Market Value ($1,500,000) of the polishing and buffing machine. This discrepancy was allocated to goodwill to avoid any unnecessary reporting. An adjustment will be required to comply with the IFRS. Therefore, the polishing and buffing machine must be adjusted to the fair market value and the discrepancy should be allocated to goodwill and amortized.
Also, SSI intends to keep the Footsie name and brand intact, as a result, a value will need to be established which will reduce the goodwill allocation noted above.
Transfer of Ownership & Foreign Exchange Risk
On September 1, 20X0, after the acquisition of Footsie, SSI transferred the ownership of the shoe manufacturing machinery that SSI purchased on July 1, 20X0 for EUR 400,000 that was borrowed at a rate of 7%. The machinery is expected to have a useful life of 12 years and the loan is repayable in 15 annual installments commencing July 1, 20X0. We need to verify that the useful life is accurate and determine whether the proper amount is being recorded as amortization. Also, we will have to make adjustments for the foreign exchange risk faced by both entities.
Another point to keep in mind is the fact that the loan is repayable in Euros. Therefore, SSI will be faced with monthly foreign exchange risk. SSI may want to consider hedging the risk. This can be accomplished by taking part in a currency swap or SSI can buy future or forward contracts to minimize or eliminate foreign exchange risk. SSI is exposed to foreign exchange risk due to translation exposure. This exposure results from the translation of foreign currency denominated financial statements into dollars. Only those financial statement items translated at the current rate create an accounting exposure. If an item is translated at the historical rate, the Canadian dollar amount is fixed at its historical cost and will not be affected by rate changes. However, if an item is translated at the current rate, the Canadian dollar amount will change every time the exchange rate changes.
Foreign Operation Classification
In accordance with IAS 21, Footsie has been classified as a foreign operation. Therefore, in order to consolidate the financial statements, Footsies financial statements will have to be translated in Canadian Dollars. In addition, all transactions should be initially recorded at the exchange rate on the date of the transaction and the following rules will apply on each balance sheet date:
- foreign currency monetary amounts should be reported using the closing rate - non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction - non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined.
Revaluation of Land & Building
Footsie revalued the building and land to fair market value in accordance with IFRS. However, Footsie's accountant incorrectly recorded a EUR 40,000 in the current year and recorded a EUR 10,000 loss in the previous year in profit and loss. The gain and loss should be recorded in Other Comprehensive income. Therefore, in the current year, an adjustment is required to reclassify the current years gain and the prior years loss to Other Comprehensive Income....