Important Managerial Controversies in Conversion of Financial Statements

Important Managerial Controversies in Conversion of Financial Statements

Alin Eliodor Tănase, Dumitru Alexandru Stoica, Nicoleta Ileana Trăistaru, Monika Brigitte Sürgün
Copyright: © 2020 |Pages: 12
DOI: 10.4018/978-1-7998-0178-8.ch012
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Abstract

Functional currency has been defined as the currency of an entity's main economic environment. A group does not have a functional currency, but the functional currency is set at the level of each group entity. Determining each functional currency at each component of a group is made by looking at several factors. In this chapter, the conversion occurs when the currency in which the financial statements are prepared is different from the presentation, and the important managerial controversies are presented in the conversion of the financial statements. The results show that the conversion of financial statements applies only if the entity whose financial statements are converted has a functional currency that is not a hyperinflationary economy.
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Introduction

The International Accounting Standard (IAS) shall be taken into account when accounting for transactions denominated in foreign currency or when the financial statements are translated into the presentation currency (Ball, Li & Shivakumar, 2015; Iatridis, 2010; Guthrie & Parker, 2016). The conversion occurs when the currency in which the financial statements are prepared is different from the presentation currency (Zéghal, Chtourou & Mnif, 2011; Lobo & Zhou, 2001). With respect to the conversion of financial statements, it should be noted that this standard applies only if the entity whose financial statements are converted has a functional currency that is not a hyperinflationary economy (Jones & Smith, 2012; Watts & Zimmerman, 1978; Richardson, 2011; Ball, Li & Shivakumar, 2015).

In examining whether significant influence does exist, we will take into account the existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities (Choi, Peasnell & Toniato, 2013; Barth, Landsman & Lang, 2008; Cairns, D., Massoudi, Taplin & Tarca, 2011). Potential voting rights that are currently exercisable or convertible must be taken into account because an entity may own warrants on shares, options to purchase equities, debt or equity securities that are convertible into ordinary shares or other financial instruments - if exercised or converted - and that can lead: either providing an entity that holds more voting rights; or reduce the voting rights of another party's financial and operating policies (i.e. potential voting rights).

It is considered that potential voting rights are not currently exercisable or convertible if they cannot be exercised or converted until a future date or until the occurrence of a future event. If the investor loses the power to participate in decision-making regarding financial and operating policies of the investee entity, then we can say that it has lost significant influence (Allen & Ramanna, 2013; Bozec, 2008; Chen, Tang, Jiang & Lin, 2010; Tendeloo & Vanstrelen, 2005).

A joint venture type of shared commitment where the parties have joint control of the undertaking and also of the rights to the net assets of the undertaking (Daske & Gebhardt, 2006; Marra, Mazzola & Prencipe, 2011). There may be joint commitments which the parties have rights to the assets and obligations for liabilities related to commitment (Ghosh & Olsen, 2008; Landsman, Maydew, & Thornock, 2012). This type of commitment is called joint venture operation and it is not covered by this material, nor do we apply the equity method (Pope & McLeay, 2011; Pieper, Trevor, Weller & Duchon, 2017).

Key Terms in this Chapter

Fair Value: The amount at which an asset is bought or sold in an arm’s-length transaction, in which neither party is forced to act.

Equity: Total debts and owners’ rights claimed for a specific period of time.

Accounting Estimates: Are often made under uncertainty in terms of determining their value as it involves the use of judgment. As a result, the risk of material misstatement is greater when these estimates are involved and in some cases the auditor may determine that the risk of material misstatement is greater, and it requires special attention in the audit.

Performance: The ability of an organization to exploit its environment to access scarce resources.

Joint Business: Is defined as a transaction or other event in which an acquirer obtains control of one or more businesses. After completion of the combined entity as transferee undertaking and acquire continues its existence as a separate legal entity. In practice, some transactions sometimes called “true mergers” or “mergers between equal entities” are also business combinations.

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