Three Common Currency Adjustment Pitfalls Case Study Solution
It has been a long time since, the accounting standards relates to the foreign currency transactions which have changed.Making the chances of errors and frauds even brighter. Due, to the increase in the exports of the U.S many companies, which were only operating in the U.S. now operates in many parts of the world. Furthermore, the increased volatility in the value of dollar, makes this risk more prominent and significant, than it was in the past ten years or more. The three common currency adjustment pitfalls are described below:
Pitfall One: Charging the foreign exchange gains and losses to OCI rather than charging them to PnL:
Both IFRS and U.S. GAPP requires the entities, to charge exchange gains and losses from foreign currency transactions.To statement of profit and loss, rather than to other comprehensive income. Many companies charge these gains and losses to OCI, to improve the profitability and to hide losses, as this area requires high expertise and time requirements.The auditors also fails to identify these material misstatements. These misleading transactions mainly occur, where the parent company owed a sum of money to its foreign subsidiary. It is because of the dual impacts i.e. in preparing the individual accounts and on preparing the consolidated accounts. (Hafeez, 2016)
Pitfall Two: Preparing the cash flow statement of cash flows on the basis of consolidated Balance Sheet:
The second pitfall of currency adjustment is that, many accountants prepares consolidated cash flow statements, on the basis of figures presented in the consolidated Balance Sheet.They use the closing rate, to convert the figures presented in the individual accounts. However, U.S. GAPP prohibits an entity to use the closing rate, and forces to use the average rate of the year. There might be very large differences arise by using the closing rate, rather than average rate.The differences might be favorable or unfavorable for the entity. As per U.S. GAPP the entity should have to prepare its consolidated statement of cash flows.By preparing the statement of cash flows of each subsidiary and then translate it, by using average rate of the year.To prepare the consolidated statement of cash flows. (Spencer & Richards, 2012)
Pitfall Three: Failure to amend the financial accounting procedure for foreign currency transactions in times of high inflation:
The accounting treatment of foreign entities differs at the time of high inflation, than the accounting treatment in times of moderate or low inflation. The entity should have to retranslate the monetary assets and liabilities at each year end.By using the closing rate and for the non-monetary assets and liabilities, the entity should have to retranslate the assets at time of disposal, impairment and revaluation. Failure to change the accounting treatment in the high inflation environment, might have a great positive or adverse impact, on the financial statements of the entity. (Creech, 2014)
Current Event:
The current event which took place in the U.S. in the past six months arise, when Abbott limited fails to properly accounts the cash flows from its subsidiaries. Abbott fails to apply the proper accounting treatment, regarding the cash flow statement of its Indian subsidiary. Abbott laboratories translate the cash flow statement, by using the closing rate, rather than on the basis of average rate.......................
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