How important is translation

exposure to a multinational
enterprise, and how may
translation exposure show up
in a company’s many foreign
subsidiaries?

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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?

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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”

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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.

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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?

• Although this debate seems to continue in academia, many in

industry see no real debate: they try to manage it. Meaghan
O’Connor’s performance is judged primarily by financial results,
which are indeed a function of the accounting treatment.
• She – like most anyone with a position of responsibility and specific
expectations of performance – will do her best to maximize the
profitability of her unit. That means determining the drivers of these
translation losses and managing them to whatever degree she can
prudently.

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 LaJolla Engineering: Case Questions

3. What would you recommend that Meaghan do?

• Jamaica. Meaghan will have to accept the current situation. The

CTA losses are arising from the balance sheet of the subsidiary, not
from actual on-going earnings. The risk-sharing agreements will
protect much of the on-going operational results.
• Mexico. This situation requires that Meaghan move quickly to
resolve the issues and confusion. She may employ outside
accounting consultants or auditors, or recruit Spanish-speaking
support for her review of the Mexican operations. But this problem
should be moved on quickly and aggressively.
• Venezuela. Meaghan’s real alternative is simply to continue to
press the partner for at least on-time payments, and possibly to
slowly and steadily alter the fixed plant and equipment, the longer
term assets of the Venezuelan subsidiary, to reduce future
translation losses.

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 LaJolla Engineering: Case Questions
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?

• Jamaica. The Jamaican business unit is local currency functional

(Jamaican dollar), which has been falling over recent years against
the US dollar.
• The balance sheet of the Jamaican business unit will continue to be a
source of translation losses (passed through to the CTA account of La
Jolla itself), as long as the exchange rate continues its current trend.
• The currency risk sharing agreement which the business has with the
Jamaican customer(s) will work to preserve the US dollar value of the
Jamaican business’ sales and earnings. Which is in fact an operating
exposure solution.

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 LaJolla Engineering: Case Questions

2. Continued

• Mexico. This is most likely more of a management issue, than a

financial issue. Because the Mexican business is relatively new,
meaning that the historical exchange rate in place for most of the
non-monetary assets of the Mexican business was relatively recent,
translation should not result in that large of foreign exchange
translation losses.
• That is – if the translation is being performed correctly. Although
there is insufficient information to make a true determination here,
the problem is most likely a result of either using the incorrect set of
Mexican accounts (the indexed Mexican peso balance sheet rather
than the original one used under US accounting practices) or that the
Mexican financial controller is not performing the translation
calculations correctly.
• Most multinational companies would resolve the situation by hiring an
outside accounting firm in the subject country to conduct their own
review of the financial statements and accounting practices.

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 LaJolla Engineering: Case Questions
• Not discussed in the case was that part of Meaghan’s problem in
Mexico was that the controller of the Mexican subsidiary did not like
working work with Meaghan

• Although she could not be sure, she believed it was because she was a
woman
• Every time Meaghan had talked with her Mexican controller, either by
phone or in person, he always claimed to not understand her
questions, which were all in English
• Meaghan believed that the problem was not linguistic, but gender
• In the end, rather than escalate a difficult situation, she had her senior
financial assistant handle all discussions with the Mexican controller;
not a perfect solution, but then again, it is not a perfect world –
something which Meaghan O’Connor knew from personal experience as
she has worked her way up in a traditional male-oriented industry and
business.

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