Question

How should a company that owns a subsidiary operating in Brazil, with the Brazilian Real (RS) as its functional currency, handle the translation of financial statements? What are the key considerations and steps involved in translating the subsidiary's financial statements to the parent company's reporting currency?

Answer 1

When translating the financial statements of a subsidiary operating in Brazil to the parent company's reporting currency (e.g., US Dollar), key considerations and steps include determining the exchange rate and translating the subsidiary's financial items using the rate. The translated statements can then be consolidated with the parent company's statements.

Step-by-step explanation:

When translating the financial statements of a subsidiary operating in Brazil, with the Brazilian Real (RS) as its functional currency, to the parent company's reporting currency, there are several key considerations and steps involved:

1. First, the subsidiary's financial statements need to be converted from the functional currency (Brazilian Real) to the reporting currency (e.g., US Dollar). This process is called translation.
2. Next, the exchange rate between the two currencies needs to be determined. This can be the current market exchange rate or a specified rate provided by the parent company.
3. Once the exchange rate is determined, the subsidiary's financial statements are translated by multiplying each financial item (e.g., assets, liabilities, revenue, expenses) by the exchange rate.
4. The translated financial statements can then be consolidated with the parent company's financial statements to provide a comprehensive view of the overall financial position and performance of the company.