Foreign operations in a hyperinflationary economy Portasports, an EU firm, assembles and markets portable sports facilities – or ‘kits’. A kit allows sports matches – in, say, soccer, tennis or rugby – to be held in a village or town which lacks permanent facilities for that sport.

At the start of x3, Portasports establishes a subsidiary in the South Sea Islands (SSI). Portasports

(SSI) imports ‘portatennis’ kits from Europe. Each kit contains the key elements of a competition tennis court – ‘roll-away’ court with net, scoreboard and spectator stands.

CHAPTER 15 • TRANSACTIONS AND OPERATIONS IN FOREIGN CURRENCIES 487 488 PART 2 • THE HOUSE OF ACCOUNTING Portasports (SSI)’s initial balance sheet is as follows (amounts are in millions of pistoles):

Balance sheet at 1/1/x3 Inventory 9 Share capital 11 Cash 2 Liabilities 0 Total assets 11 Total equities 11 The inventory consists of three kits costing 3 million pistoles (or A500,000) each.

Portasports (SSI) trades profitably in its first year. It sells two of the three kits. Its x3 accounts are shown in Exhibit 15.6, together with relevant exchange rate and inflation data.

The South Sea Islands have experienced a rapid increase in prices in recent years. The cumulative rate of increase in the three years to the end of x3 is 125%.

Required

(a) Convert Portasports (SSI)’s x3 accounts from pistoles into euros. Either restate the accounts into end-x3 constant purchasing power units and translate the restated accounts at the closing rate or translate the unadjusted accounts using the temporal method.

(b) Portasports records a translation loss of A0.16 million in its consolidated x3 accounts with respect to its SSI subsidiary. Suggest ways in which it can reduce or eliminate future translation losses using a natural hedge.AppenedixLO1

Transcribed Image Text:

Exhibit 15.6 Portasports (SSI): summary x3 accounts and related data (currency amounts in millions of pistoles) Sales revenue (2 kits @ 7.5) Less: Cost of kits sold Portasports (SSI) Income statement for x3 Other expenses Profit Inventory (1 kit @ 3, 2 kits @ 3.5) Cash Total assets Inflation data: Balance sheet at 31/12/x3 10 * | Share capital Profit for x3 Liabilities Total equities 15 ||w los do 11 397|| Index during x3 Index of consumer prices (start-x1 = 100) Start-year 180 End Qtr 2 198 End Qtr 3 210 End-year 225 Exchange rate data in x3: Pistoles per euro Start-year 6 End Qtr 2 6.6 End Qtr 3 7 End-year 7.5 Assumptions: The 'portatennis' kits are imported at the start of x3. Sales are made and other expenses incurred at the end of quarter 2. Inventory is replenished (2 kits @ 3.5) at the end of quarter 3.