ABC Corp. International Company, a manufacturer of medical device, assembles a particular product line at a wholly owned facility in Singapore. The product is designed at XYZ’s headquarters in the United States, but the different components used in the assembly process are manufactured throughout Asia and shipped to Singapore for final assembly. Some of the components are manufactured in multiple locations, so the customer can actually designate where ABC Corp. should source the components. The final product is assembled in Singapore and then shipped via FedEx Freight to customers in European Union and throughout Asia. ABC Corp. Singapore does not purchase any major components from the United States, but it invoices all of the components from Asian suppliers in U.S. dollars. Moreover, it sells the product to Asian customers in U.S. dollars. However, all of its major expenses in Singapore are paid in Singapore currency. Most of the key executive marketing decisions are made by the U.S. marketing headquarter staff, although the Singapore staff acts as a liaison with FedEx Freight personnel and deals with the local employees, most of whom come from the European Union on short-term work visas.
Answer the questions:
1.When it comes to translating the financial statements of entities in highly inflationary countries, which of the following approaches makes more sense and why? What are the implications of this for ABC Corporation?
- 1st option – Remeasure using the temporal method, even though the functional currency is the local currency for operation purposes.
- 2nd option – Restate for inflation and translate using the current rate method.
2. Why do currency differences affect foreign exchange reporting? Specifically, how do these differences impact ABC Corporation? What difference has the introduction of a comprehensive income statement made to U.S. national accounting for foreign exchange? Assuming that a U.S. company has a subsidiary around the world and the foreign entity is relatively independent from the parent company, how would you anticipate that the exchange rates would impact the results of operations when translated into dollars?
Must be at least one page long.