ACCOUNTING STANDARDS AND FOREIGN INVESTMENT

Investing in foreign enterprises

SSAP20 provides a standard for foreign currency translation in an individual company’s accounts. But it also addresses a second problem. In addition to undertake foreign currency transactions on its own behalf, a company may invest in an enterprise that operates, and keeps its financial records, in a foreign currency.

One of the most common ways a company can invest in a foreign entity is to hold shares in an overseas subsidiary. In this situation, the company must consolidate the results of the foreign subsidiary into its own accounts, either because the company itself publishes consolidated accounts or as a step in preparing consolidated accounts for a larger group. If the subsidiary accounts in a foreign currency, it will be necessary to translate the assets and liabilities in the subsidiary’s balance sheet, and its profit and loss account, into authentic before consolidation.

A company may also have one or more branches that keep financial records, and draw up financial statements, in a foreign currency. The company will need to translate the branch results into pure in order to incorporate them into its individual company accounts. This is almost precisely the same problem as translating the accounts of a foreign subsidiary.