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A wholly owned subsidiary is a company completely owned by another company called the holding company or rather the parent company. The holding company will hold the subsidiary’s common stock. Since the parent company owns the subsidiary’s stock, it therefore has the right to appoint the board of directors of the subsidiary company. Wholly owned subsidiaries may be part of the same industry as the holding company or a part of an entirely different industry. At times, a company may spin off part of itself as a wholly owned subsidiary such as an Electronics Company spinning of its printer manufacturing division.
Reporting entities are required for the identification of their functional currency. An entity’s foreign currency is the currency of the primary economic environment in which that entity operates. The functional currency of a company based in the United States will be the US Dollar. The economic environment in which the entity primarily operates is usually the one it generates and expends cash primarily on. For this matter, there are certain important economic factors an entity considers in determining its functional currency: the currency that mainly influences the prices of goods and services offered; often, this is the currency in which sales prices for its services and goods are denominated and settled, the currency of the country whose competitive regulations and forces determine the sale prices of its services and goods, the currency that inspires labor, materials and more so other charges of providing goods and services is mainly considered. This is often the exchange in which such costs are denominated and settled. The currency in which funds from financing activities are generated will have a bearing on an entity’s functional currency. That currency from the receipts and operating activities is also a way of generating the funds and they are usually retained. A change in the foreign currency takes place if at all there is a change in the underlying events, transactions and conditions that are pertinent to the entity. In this case, this is expected to rise since the US decided to adopt the Euro.
There are additional factors also considered in determining the functional currency of a foreign operation. This will eventually lead to the conclusion as to whether the functional currency is the same as that of the parent. These factors include determining whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant extent of autonomy. Determining whether the transactions with the reporting entity are of a low or high proportion to the foreign operation’s activities is a factor too. Consider whether the cash flows from the activities of the foreign operation affect the cash flows of the reporting entity directly and whether they are readily available for remittance to it. Determining whether cash flows from the activities of the foreign operation are adequate to service existing is similarly essential. A normally projected debt obligation with no funds being made accessible by the reporting entity is another factor.
The financial statements of foreign subsidiaries having the local currency as the functional currency are translated into U.S. dollars. The translation is done using the exchange rates in effect at period end for assets and liabilities and average exchange rates applicable for each reporting period for the operational results. Adjustments that result from the translation are reflected as a separate component of comprehensive loss or income. The financial statements of the Nouveau Company that has the Euro as the functional currency, in addition to some of the transactions denominated in a local currency are measured in U.S. dollars. The measurement of local currency amounts to Euros hence creating measurement losses and gains included in the earnings. The earnings are a component of general, selling and administrative expense. Foreign currency transactions and forward foreign currency exchange contracts that are not designated as hedges generate losses whenever settled. Foreign currency transactions may produce payables or receivables that are fixed in terms of the amount of foreign currency received or paid.
Since Nouveau Company is wholly owned; it will depend fully on the Tyler Company, which is the parent company. Tyler Company is a US company and so with the ownership of Nouveau, which is a French company, it will expand beyond the United States. The French company was already established and so the Tyler Company did not require much investment. Setting up a new company or a branch of the same in France would have been more expensive. The shares of stock in the Nouveau Company are held as assets on the books of the Tyler Company. These shares can be used as collateral for additional debt financing. The two companies are considered a single economic entity and the consolidated financial statements are prepared for the entire structure. Tyler industries will have a good platform for the sale of their products in France. The Tyler’s products will be sold to the French market easily because Nouveau Company is an established company. This means that the market of Nouveau in France is the same that will be used by Tyler. The products will be manufactured by the Tyler Company and brought to the Nouveau Company. The Nouveau will then do the distribution of the products in their local market in France. The company can distribute the products to the international market. Consequently, it means that the Tyler Company will be expanding beyond the United States.
Since Nouveau is a company by itself, manufacturing process ascribed to its products continues. The company produces these products entirely for the European market. The company uses the local labor and gets its raw materials from the country. It is good to note that the company does the manufacturing in France, the country in which the company is situated. For a company to be sold to another company there must be reasons as to why the sale is done. In this case, the Nouveau Company has no funds, and so it solemnly depends on the Tyler Company. For the Nouveau to conduct its operations it needs cash and from the note signed by the two companies, the Tyler Company would supply the cash for just two years (Kettell 56). There is a big possibility that from the way Nouveau is conducting its business, the company will not be having enough funds to stand on its own.
As stated earlier in this memo, Nouveau will be selling its products to the local market in France and in other parts of the European continent as a whole. This is the primary market of the company and this means that the products’ supply is high since it covers a wide domain. Note that the Nouveau Company distributes the Tyler’s products too. Nouveau therefore serves as a distributer of Tyler’s products in Europe. From the distribution of these U.S. products, it is therefore evident that the revenue of the Tyler Company is going to grow. Nouveau Company is also expected to generate more income from the sale of these U.S. products. It is expected to generate approximately sixty five percent of the company’s revenue in the next few years. Tyler Company is not taking the cash flows from the sale of its products in Europe by Nouveau Company. Instead, Tyler Company’s plans are to leave the funds to Nouveau Company to fund its future operations and its expansion. Surprisingly, Nouveau Company is not expected to pay any dividends to Tyler.
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