Hedging Foreign Exchange Exposure - Essay Example

Transaction and explanation

Business Reason

1)      Depreciation of each subsidiary asset would be recorded in the subsidiary's books of account. As each subsidiary would have different assets under their control so it would result in different depreciation expenses. This would need to be matched against the revenues arising from these assets in the subsidiary's book only according to the matching concept (Wildman, 1913).

Qantas Ltd is responsible for the assets that are under the parent company use only and does not bear the expense for subsidiaries' assets. Therefore under the matching principle, the depreciation expense should be charged against the subsidiary's gross profit.

2)      Maintenance and overhauling cost of each subsidiary is shown in their financial statement as opposed to the financial statement of parents. Each subsidiary is likely to incur this cost based on its need for maintenance.

This is also based on the underlying principle of matching concept whereby each subsidiary (JETSTAR) recognizes the revenue it earns from freight and air passengers it is necessary to match the maintenance cost incurred against the revenue earned. Qantas Ltd cannot undertake the transaction as this would result in bearing expenses for revenue that has not been earned by the parent company.

3)      External segment tours and travel revenue of Jetstar would be recorded in the subsidiary's books of account (Qantas, 2010). This is the revenue that does not contain any inter-group transactions (that are automatically eliminated in the consolidated statements) but rather pertains to sales made to external customers (Hodge, 2009). This segment is not targeted by Qantas Limited and revenue arises as a result of operations conducted by Jetstar Pacific.

The business reason for this transaction not being undertaken by Qantas Ltd is that Jetstar is essentially targeting its flight at different routes in order to maximize cost-saving for the entire group such as undertaking the route to New Zealand. The revenue principally arises as a result of operations undertaken by Jetstar and thus are recorded in subsidiaries' books.

The functional currency is defined as the currency of the primary economic environment in which the entity operates (Hodge, 2009). If the functional currency of the subsidiary of Qantas Limited is the Australian dollar (AUD) then the subsidiary financial statements would involve the statement of Assets and liabilities, revenue, and income in the Australian dollar only. If the subsidiary has a functional currency other than the Australian dollar, for example, the American dollar then the entity will state its Assets and liabilities, revenue, and income in terms of the American dollar. However, at the point of consolidation, a presentation currency would need to be determined by the Qantas group which is the Australian dollar in this case. Read More