Translation and Performance Evaluation: Management compensation is often based on reported profits. What profit measurement is appropriate for top management to use in judging the performance of a U.S. Company's foreign subsidiary? Consider a Dutch subsidiary that reported the following results in euros for 2012 and 2011.
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in thousands
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|
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2012
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2011
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Sales
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€2,400
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€2,000
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Cost of Sales
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€1,320
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€1,200
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Gross Margin
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€1,080
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€800
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Other operating expenses
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€230
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€200
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Profit before taxes
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€850
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€600
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Income tax expense
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€255
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€180
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Net Income
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€595
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€420
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Average exchange rate: $1.10/€ for 2012. $1.20/€ for 2011. Composite historical rates relating to cost of sales and other operating expenses (including depreciation): $1.12/€ for 2012, $1.23/€ for 2011.
Required:
a. Prepare a schedule showing the Dutch subsidiary's income statement for 2011 and 2012 in euros and in dollars, using both the current rate and temporal methods. Compute the percentage change in income in each case.
b. Comment on the comparability of the translated income statements, focusing on the impact of the change in dollar value of the euro. Compute the ratios of net income/sales using the Euro statements and the dollar financial statements. How could you adjust the translated statements to enhance comparability? Show computations and comment on the results.
c. Comment on the impact of the euro weakening vs the euro strengthening in subsequent years. What will be the impact on the parent company?