Minicase10

Mini Case 10
LaJolla
Engineering
Services

How important is translation exposure to a multinational enterprise, and how may translation exposure show up in a company’s many foreign subsidiaries? MC10-2

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LaJolla Engineering: Case Questions
1. Do you believe Meaghan O’Connor should spend time and resources attempting to manage translation losses, what many consider purely an accounting phenomenon? 2. How would you characterize or structure your analysis of each of the individual country-threats to LaJolla?
What specific features of their individual problems seem to be intertwined with currency issues?
3. What would you recommend that Meaghan do?

MC10-3

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LaJolla Engineering Services
• Meaghan O’Connor was CFO of LaJolla Engineering’s Engineering
Equipment Division in early 2004
• Meaghan had been promoted only recently to CFO of the EE Division, and now discovered she had some large challenges
• This division was considered the “Big Iron” within the mostly service-based engineering services firm; Meaghan, therefore, had to manage sizable capital asset investments in a multitude of countries
• Although many companies, including LaJolla, are used to suffering periodic foreign exchange gains/losses, it was pretty unusual for those fx losses to be arising from translation • LaJolla’s translation gains/losses
• Each of the foreign subsidiaries which Meaghan was focusing on were local currency functional according to translation practices in the United States; this meant that each of the foreign subsidiaries’ primary currency driving its financial and business results was the local currency -- the Jamaican dollar, the Mexican peso, and the
Venezuelan bolivar
• When a foreign subsidiary is local currency functional, any currency gains and losses arising from the translation of the subsidiary’s balance sheet into the currency of the parent company for consolidation purposes is accumulated in the consolidated balance sheet’s equity account line item called the “cumulative translation adjustment” MC10-4

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LaJolla’s
Translation Losses

Exhibit B Mexican Pesos per U.S. Dollar

Exhibit A Jamaican Dollars per U.S. Dollar

Exhibit C Venezuelan Bolivars per U.S. Dollar

All three currencies -- the Jamaican dollar, the
Mexican peso, and the Venezuelan bolivar – had fallen in value against the dollar very rapidly in the past three year period.
This fact alone would create substantial translation losses for LaJolla arising from the annual consolidation of all foreign subsidiaries with the financial results of the U.S. parent company. MC10-5

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