mcgladrey case study presentation

Le Pumps Case Study

Alex Koehler

Anita Sayyed

Ronald Honse Jr.

Brief Explanation of Case

Ferguson (US)/Le Pumps (UK) Functional currency determination Necessary adjusting entries for consolidation

Determination of Functional Currency

Functional Currency: “currency of the primary economic environment in which the entity operates” (ASC 830-10-45-2)

ASC 830-10-45-3 Le Pumps’ day-to-day operations not dependent on

economic environment of dollar Le Pumps’ cash flow can be converted into dollars and

paid back to parent company, Ferguson Functional currency: Pounds

Determination of Functional Currency (Continued)

ASC 830-10-55-5

Economic Factors Functional CurrencyCash flows Pound

Sales price Pound

Sales market Pound

Expense Pound

Financing Dollar

Intra-entity and arrangements Pound

Authoritative Support

Topics

810 Consolidation

830 Foreign Currency Matters

323 Investments—Equity Method and Joint Ventures

Purpose

ASC 810-10-10-1 “To present…the results of operations and

financial position of a parent and all its subsidiaries as if the consolidated group were a single economic entity.” For the benefit of owners and creditors of the

parent entity. Consolidated financial statements are more

meaningful than separate financial statements.

Intra-Entity Transactions and Balances

ASC 810-10-45-1 Intra-Entity balances and transactions shall be

eliminated upon consolidation. Includes:

Intra-entity open account balances Intra-entity sales and purchasesIntra-entity profits and losses on assets

remaining within the consolidated group

Translation Adjustments

ASC 830-30-45-12 Result from translating subsidiary’s functional

currency into the reporting currency. Not included in determining Net Income Reported in Other Comprehensive Income

Recognition of Subsidiary’s Earnings

ASC 323-10-35-4 Investor shall recognize it’s share of the earnings

or losses of an investee in income. Investor’s share is based on the shares of

common stock and in-substance common stock held by the investor.

Le Pumps, Ltd –> wholly owned by Ferguson Pumps, Inc.

Consolidation Process

ASSETS

LIABILITIES

Equity

ASSETS

LIABILITIES

EQUITY

-

=

Investment in Sub

ASSETS

LIABILITIES

EQUITY

FERGUSONS

CONSOLIDATED ENTITY

LEPUMPS

=+

Steps to Consolidation

STEP 1: Inclusion of profits of Subsidiary in Parent’s income

A. Translation of investment Account.

B. Including income of LePumps Inc.

B1 Record translation gain on income

Steps to Consolidation (Continued)

STEP 2: Elimination of subsidiary’s Equity

C. Elimination of Le Pumps Equity

Consolidation Process

ASSETS

LIABILITIES

Equity

ASSETS

LIABILITIES

EQUITY

-

=

Investment in Sub

ASSETS

LIABILITIES

EQUITY

FERGUSONS

CONSOLIDATED ENTITY

LEPUMPS

=+

Purchases

Unrealized Profits

Sales

Steps to Consolidation (Continued)

STEP 3: Elimination Of Intercompany TransactionsD. Elimination of unrealized profits

I. Elimination of Intercompany sales and purchases

Consolidation Process

ASSETS

LIABILITIES

Equity

ASSETS

LIABILITIES

EQUITY

-

=

Investment in Sub

ASSETS

LIABILITIES

EQUITY

FERGUSONS

CONSOLIDATED ENTITY

LEPUMPS

=+

Intercompany

Receivable/ Payable

Steps to Consolidation (Continued)

STEP 4: Elimination Of Intercompany BalancesE. Translation Gain/Loss on intercompany

receivable/payables

F. Elimination of Intercompany receivables

G. Long term Receivable/Payable translation gain/Loss

H. Elimination of long term receivable/ Payables

Quick Recap of Case

Loan forgiveness of $2000,000

Fergusons: Loss of $2000,000 in in P&L

LePumps:Loan recorded @ .6307GBP:$Loan forgiven @.614GBP:$gain of GBP 1,227,974 on loan forgiveness and a translation gain of GBP33,370. Both will be included in the profit for the year.

Special Thanks to:

Mr. Guy M. Gross

Mr. Robert E. StoettnerPartners from McGladrey