IntroductionThe past decades have seen an upsurge of International trade, financing and investments, and related cash and credit transactions at an extremely rapid pace. To accommodate the need for foreign-currency denominated transactions, international monetary systems have continued to evolve and in the process have provided opportunities for meeting these growing demands. This has developed into a global sector with international banking market worth 25 trillion US-Dollars of cross-border claims, foreign exchange market with a daily turnover of about 2 trillion US-Dollars, international debt securities of about 18 trillion US-Dollars outstanding, and derivatives market worth 415 trillion US-Dollars in contracts outstanding.
Financial players in the global market including institutional investors, hedge funds, private equity firms and state owned investment authorities are now involved in cross-border mergers and acquisitions (of about 360 billion US Dollars in 2006) and the increase use of complex financial instruments such as derivatives. All of this has led to increase businesses around the world, be it in same country or in different countries. But what is most important is to be familiar with the business environment in which the business is intended to operate that often may have considerable influences on the business such as the values of society, and the influence of organised groups, such as government departments, consumer groups, environmental groups, animal welfare organisations.
But most importantly, businesses are out to generate profits for the investors and to do, serious considerations as to the economic conditions of the host country. A thorough research has to be done to know the company competitors, the market position and their customer’s preferences. Foreign currency translationStatement of Standard Accounting Practice (SSAP) No.
20 (2003) sets out the standard accounting practice for foreign currency translation but does not give any method of calculating such profits and losses that may arise from a company’s dealing and operations due to overseas trading. But at the end of the day, foreign currency translations are required so as to prepare the consolidated financial statements of the foreign enterprise into the currency used in reporting purposes by the main company. Accounting Standards Practice for Enterprises (ASPE) No 19 (2006) provides such monetary amounts to be calculated at the spot exchange rate following the balance sheet date of preparation.
Under the Generally Accepted Accounting Principles (GAAP), two methods are provided for calculating foreign currency transactions; the current rate method and temporal rate method. Under the current rate method, all net assets are measured using current rates, which as stated by ASPE No 19, are calculated using the spot exchange rate. Meanwhile under the temporal rate method, only some assets are translated using the spot rate, which often makes the calculations complicated since one will have to calculate the exposed position of the company on the financial market.
It is not therefore advised to do such calculations using the temporal method since it gives room for some irregularities especially as not all assets are calculated. Therefore in the case of the company, with a direct sterling/euro exchange rate of 0,7 and an initial investment of 5 million Euros, this means