With the multinational company (MNC) becoming a significant business structure throughout the world, a growing problem is developing in the analysis of the MNC's financial results. When the incidents in this problem occurred, the U.S. dollar was strengthening considerably relative to other currencies. Besides causing economic problems in many developing countries, it also created a problem in the proper evaluation of a multinational's subsidiaries and their contribution to its total results.
Security System Corporation provides financial services for dealers and consumers in a variety of construction and consumer product areas. The firm is searching for the proper method to evaluate its subsidiaries. Of concern is each subsidiary's contribution to the company's overall earnings and how to evaluate whether the specific goals developed by the subsidiary's management have been met.
In search of answers, the company is concerned with the following concepts:
• Analysis of results: In local currency or U.S. dollars?
• Management's explanation of variances: In local currency or U.S. dollars?
• What should the time frames be for comparative data: Plan or forecast? The company has six distinctive business segments in the new-residential-housing market: consumer appliance market, commercial nonresidential construction, consumer aftermarket, home furnishings market, automotive market, and capital goods markets. Last year the company achieved 30 percent of its revenues and 35 percent of its earnings from its international subsidiaries. However, years ago, when one British pound sterling equaled US$2.33 (whereas now it's one pound – US$1.62), the company achieved 35 percent of its revenue-but more significantly, 47 percent of its earnings-from its international subsidiaries. During the past five years, although the U.S. dollar equivalent of earnings from the international subsidiaries has declined from 47 percent of the total to 35 percent, most operations have reported significant, steady year-to-year gains when expressed in the local currency. All operations report their monthly financial data to the company's world headquarters in U.S. dollars. They use the existing exchange rate at the close of business on the last day of the month. The company reports the exchange based on accounting guidelines (except for one or two special situations). The comparisons of the monthly financial data are made against a financial plan that uses a predetermined exchange rate for the various months of the year.
Over the past five years, as the U.S. dollar has fluctuated against foreign currencies, the company has analyzed the financial results of its operations totally in U.S. dollars. It then compares these results to a fixed-plan exchange rate.
The company establishes exchange rates to be used each year, many times optimistically, and then sets an earnings per share (EPS) target on that basis. If the dollar strengthens even more, the company misses its targets and prepares statements showing that a particular group missed its planned targets when, in fact, all of the group's operations could have exceeded their local currency plans but are losing on the comparison because of unfavorable exchange-rate effects.

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How should the firm measure its results to enhance its competitive position? How can it safeguard its overall EPS target if it uses local currencies in the reporting system? Where does the responsibility for the U.S.-dollar-denominated goals lie?
(CMA Adapted)