How foreign exchange gains and losses are determined

Reference no: EM132723514

Question - Mega Concerns Inc. (MCI) is a publicly traded, Canadian-based, diversified multinational corporation with numerous subsidiaries located throughout the world. On January 1, 20X9, MCI acquired 100% of the voting shares of Vamos Cogele Ltd. (VCL), a Mexican-based manufacturing subsidiary. Pertinent details of VCL follow:

MCI has the right to appoint all seven members of the VCL board of directors. However, MCI left six pre-existing members in place because of their expertise and local connections, and appointed only one new member, who is the chair of the board.

MCI has not been required to subsidize the operating cash flow to VCL, because VCL generates sufficient cash flow from its own operations to service its debt. VCL has remained largely autonomous from MCI and makes its own strategic decisions about what products to manufacture. At the end of 20X9, VCL distributed excess cash to MCI by way of dividends.

MCI maintains a bonus plan for its key senior executives with bonuses based on consolidated earnings per share (EPS). MCI reports its financial results in Canadian dollars. You have determined that MCI's EPS for the year will be $6.59, including a foreign exchange gain of $0.32 per share if the functional currency of VCL is determined to be the Canadian dollar and $6.31 if the functional currency is the Mexican peso.

VCL prepares its stand-alone financial results in accordance with IFRS, in Mexican pesos (MXN$). VCL's accounting policies are generally consistent with those of MCI.

VCL sells all its production in Canada with the sales denominated in Canadian dollars (C$). Approximately 70% of sales are made to MCI, with the remaining 30% sold to other, arm's-length wholesalers. VCL sources most of its labour and materials locally, paying Mexican pesos for those items.

VCL's Canadian dollar sales proceeds are converted to Mexican pesos as needed to meet operational requirements and debt-servicing obligations. Approximately 60% of excess cash is retained in Canadian dollars with the balance held in Mexican pesos.

During the last 10 years, the inflation rate in Mexico has fluctuated between 2% and 6% per annum.

a) Explain how foreign exchange gains and losses are determined and accounted for:

i. If VCL's functional currency is determined to be the Canadian dollar

ii. If VCL's functional currency is determined to be the Mexican peso

b) Recommend the translation method that MCI should use when consolidating the financial results of VCL with that of MCI's own operations.

Reference no: EM132723514

Questions Cloud

What is the net amount expected to be collected : What is the net amount expected to be collected of Sheffield Company's accounts receivable after the write-off of the Ramirez receivable

How much a new expense might cost : Is the average computed in B18- E18 a good predictor of how much a new expense might cost, should we incur a new expense next year? Why or why not?

Medicare and medicaid : There are two major forces acting against each other when it comes to government healthcare programs such as Medicare and Medicaid.

Key parameters needed for calculating eoq : In a book factory, annual demand equals 2000 units, the number of working days per year is 250, Co = $150 per order and Cc = $15 per unit.

How foreign exchange gains and losses are determined : Explain how foreign exchange gains and losses are determined and accounted for: If VCL's functional currency is determined to be the Canadian dollar

Completion of the job description : Select a healthcare profession (Healthcare Administrator) or occupation and give an example of a job description for it.

Develop a whs training budget in one of the organization : Develop a WHS training budget in one of the organization. Make sure you include all development costs, delivery costs and incidental costs if applicable.

Do publix hr practices give an advantage over competitors : HR Practices Result in Happy Employees and Customers Publix, Do Publix's HR Practices give it an advantage over its competitors? Why or why not?

Describe how improved communication-collaboration : Describe how improved communication, collaboration, and teamwork can improve conditions in your department.

User Account

All Pages