On December 15, MSC Corporation acquires its first foreign affiliate by acquiring 100 percent of the net assets of the Armaselah Oil Company based in Saudi Arabia for 930,000,000 Saudi Arabian riyals.(SAR). At the time, the exchange rate was $1.00 = SAR3.750. The acquisition price is traceable to the following identifiable assets:
|
Cash |
SAR 60,000,000 |
|
Inventory |
120,000,000 |
|
Fixed assets |
750,000,000 |
As a calendar-year company, MSC Corporation prepares consolidated financial statements every December 31. However, by the consolidation date, the Saudi Arabian riyal depreciates such that the new spot rate is $1.00 = SAR4.125.
Required:
a. Assuming no transactions took place before consolidation, what would be the translation gain or loss if Armaselah’s balance sheet were translated to dollars by the temporal rate method?
b. How does the translation adjustment affect MSC’s cash flows?
c. What adjustments to Armaselah’s accounts would you make to enable you to compare its financial statements with another company of comparable size in the same industry that is employing the current rate translation method per IAS 21?