Subject: Advanced Accounting Memo 8
Date: March 18, 2015
In regards to how a functional currency should be determined for a foreign entity that has more than one distinct and separable operation. Lynch Corporation owns a subsidiary in Mexico with two distinct and unrelated lines of business. Lynch’s CEO believes that the two distinct divisions both have different functional currencies. One division’s functional currency is the U.S. dollar, which uses the temporal method to value its financial statements and the other division’s functional currency is the Mexican peso, which uses the current method to value its financial statements.
Accounting Standards Codification 830-10-45-2 says an entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. The assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. The two different rates of measuring are the current method and the temporal method. As described above the current method measures the currency at the foreign currency current rate. Whereas, the temporal method measures currency historically at the U.S. dollar rate. Both determine how foreign currency of the subsidiary will be translated on the financial statements of the parent company.
Functional currency is necessary for determining foreign currency translation so it is important that business find that functional currency. The ASC says that functional currency can be hard to find sometimes depending on the situation where in other times it is easily identifiable. For example, if a foreign entity conducts significant amounts of business in two or more currencies, the functional currency might not be clearly identifiable. In those instances, the economic facts and circumstances pertaining to a particular foreign operation...