On January 1, Year 1, Parker, Inc., a U.S.-based firm listed on the NY Stock Exchange, purchased 100 percent of Suffolk PLC, an entity operating in the oil industry, located in Great Britain. Parker paid 52,000,000 British pounds (£) for its purchases. The excess of cost over book values is attributable to land (part of property, plant, and equipment) and is not subject to depreciation. Parker accounts for its investment in Suffolk at cost. On January 1, Year 1, Suffolk reported the following balance sheet:

Cash…………………….£ 2,000,000Accounts payable ……………………..£ 1,000,000

Accounts receivable….. 3,000,000Long-term debt…………………………   8,000,000

Inventory………………..   14,000,000Common Stock………………………… 44,000,000

PP&E (net)……………… 40,000,000Retained earnings………………………   6,000,000

     £ 59,000,000   £ 59,000,000

Suffolk’s Year 1 income was recorded at £2,000,000. No dividends were declared or paid by Suffolk in 2015.

On December 31, Year 2, two years after the date of acquisition, Suffolk submitted the following trial balance to Parker for consolidation:

Cash………………………………………………….£ 1,500,000

Accounts receivable……………………………..   5,200,000

Inventory……………………………………………..   18,000,000

Property, Plant, & Equipment (net)………   36,000,000

Accounts Payable…………………………………..   (1,450,000)

Long-term debt……………………………………..   (5,000,000)

Common Stock…………………………………….. (44,000,000)

Retained Earnings (1/1/16)……………………….   (8,000,000)

Sales……………………….……………………….. (28,000,000)

Cost of Goods Sold………………………………..   16,000,000

Depreciation…………………………………………. 2,000,000

Other Expenses…………………………………….. 6,000,000

Dividends Paid (1/30/16)……………………….         1,750,000

        0+++      

Other than the payment of dividends, no intercompany transactions occurred between the two companies. Relevant exchange rates for the British pound were as follows:

	January 1	January 30	Average	December 31
Year 1	$1.60	$1.61	$1.62	$1.64
Year 2	1.64	1.65	1.66	1.68

December 31, Year 2, financial statements (before consolidation with Suffolk) follow. Dividend income is the U.S. dollar amount of dividends received from Suffolk translated at the $1.65/£ exchange rate on January 30, 2016. The amounts listed for dividend income and all affected accounts (i.e., net income, December 31, retained earnings, and cash) reflect the $1.65/£ exchange rate at January 30, Year 2. Credit balances are in parentheses.

Sales…………………………………………………. $ (70,000,000)

Cost of Goods Sold…………………………………. 34,000,000

Depreciation…………………………………………. 20,000,000

Other Expenses……………………………………...   6,000,000

Dividend income……………………………………...     (2,887,500)

Net income…………………………………………….$ (12,887,500)

Retained Earnings (1/1/Year 2)…………………  $ (48,000,000)

Net income, Year 2……………………………… (12,887,500)

Dividends, 1/30/Year 2 ………………………..…     4,500,000

Retained Earnings (12/31/ Year 2)…………   …..$(56,387,500)

Cash…………………………………………….…   $   3,687,500

Accounts receivable……………………………….     10,000,000

Inventory……………………………………………     30,000,000

Investment in Suffolk…………………………….     83,200,000

Property, Plant, & Equipment (net)………  105,000,000

Accounts Payable…………………………………. (25,500,000)

Long-term debt…………………………………….    (50,000,000)

Common Stock…………………………………….. (100,000,000)

Retained Earnings (12/31/Year 2)…………       $ (56,387,500)

Parker’s chief financial officer (CFO) wishes to determine the effect that a change in the value of the British pound would have on consolidated net income and consolidated stockholders’ equity. To help assess the foreign currency exposure associated with the investment in Suffolk, the CFO requests assistance in comparing consolidated results under actual exchange rate fluctuations with results that would have occurred had the dollar value of the pound remained constant or declined during the first two years of Parker’s ownership.

In addition to the risk Parker faces from its exposure to the British pound, Suffolk’s oil operations sometimes result in soil contamination. Suffolk cleans up any contamination when required to do so under the laws of the particular country in which it operates.

In one of the countries in which Suffolk operates, there is no legislation requiring cleanup. In that same country, Suffolk had inadvertently contaminated land in prior years. As of October 31, Year 2, it is virtually certain that a law requiring the remediation of contaminated land will be enacted in this jurisdiction, though it is not expected to be issued until after the December 31 year-end. A consultant has been hired to help estimate the cost of clean-up.

The CFO has requested assistance in assessing the risk and disclosure requirements Parker faces from its foreign exchange exposure and environmental exposure. Suffolk prepares its financial statements in accordance with (1) U.S. GAAP in reporting to its parent and (2) IFRS in reporting to its U.K.-based lender.  The CFO has requested that you prepare a memorandum with a supporting report that addresses the following requirements.

Required:

Part A. Given the relevant exchange rates presented, use an electronic spreadsheet to complete the following three parts:

1. Translate Suffolk’s December 31, Year 2, the trial balance from British pounds to U.S. dollars. The British pound is Suffolk’s functional currency.

2. Prepare a schedule that details the change in Suffolk’s cumulative translation adjustment (beginning net assets, income, dividends, etc.) for Year 1 and Year 2.

3.The spreadsheet is automatically populated directly from the general ledger, but the exchange rates must be input manually. The CFO wants you to ensure that the correct exchange rates are input and then that they are not accidentally changed. Since the exchange rates are input manually, what internal controls can you suggest to ensure that the rates in the spreadsheet are accurate? (Note: You may refer back to your Auditing or AIS classes for controls regarding the validity of inputs and spreadsheet integrity)

4. Discuss the impacts that the change in the value of the pound has had on results due to exchange rate fluctuations with results that would have occurred had the dollar value of the pound remained constant or declined during the first two years of Parker’s ownership.   ASSESS THREATS TO QUALITY OF INFORMATION.

Part B.

5. Should Suffolk recognize a provision for the environmental contingency as of December 31, Year 2 in reporting to its U.S. parent under U.S. GAAP? How about when it reports to its U.K.-based lender under IFRS?

6. Parker’s purchase of Suffolk has created additional accounting complexities. Identify some of the additional accounting issues that Parker now faces. How do these additional complexities potentially impact the quality of the accounting information for Parker? What internal controls can Parker implement to assure that the company is able to meet all information quality and disclosure requirements?

7. Parker is considering adopting IFRS for financial reporting. What are some of the key differences between IFRS and US GAAP that might impact Parker? What are some of the advantages and disadvantages that might accrue to Parker if it adopted IFRS for all of its operations?  

8. Would the adoption of IFRS require additional reporting requirements for the SEC?  What role do the IASB, FASB, PCAOB, and SEC play in promoting high-quality accounting information for US and global businesses? Does the retention of a separate US GAAP in an otherwise IFRS world environment present any challenges for US-based companies?