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McGladrey Case Study Presentation

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Anita Nizam

This case study discusses the consolidation of Le Pumps (UK) into its parent company Ferguson (US). Le Pumps' functional currency is determined to be the British Pound based on the economic factors test. The steps of the consolidation process are outlined, including translating the investment account, eliminating the subsidiary's equity, eliminating unrealized profits on intercompany transactions, and eliminating intercompany receivables and payables, with any related translation gains or losses. The case also provides an example where Ferguson forgives a $2 million loan to Le Pumps, resulting in a gain for Le Pumps and loss for Ferguson, with translation gains or losses included.

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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 Currency Cash 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 InvestmentsEquity Method and Joint Ventures
Purpose ASC 810-10-10-1 To presentthe 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 purchases Intra-entity profits and losses on assets remaining within the consolidated group
Translation Adjustments ASC 830-30-45-12 Result from translating subsidiarys functional currency into the reporting currency. Not included in determining Net Income Reported in Other Comprehensive Income
Recognition of Subsidiarys Earnings ASC 323-10-35-4 Investor shall recognize its share of the earnings or losses of an investee in income. Investors 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 Parents 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 subsidiarys 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 Transactions D. 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 Balances E. 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. Stoettner Partners from McGladrey

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McGladrey Case Study Presentation