For WizardKim-DPR2

Week 7 Discussion Post 2nd Response:

Instructions: Respond to the post below from your fellow classmate. Any opinions, or anything you would like to add to discuss about their post. Must be three substantial paragraphs, and three references.

According to ASC 830-10-20 functional currency is a company’s functional currency is the currency of the main economic environment in which the company operates (A Roadmap to Foreign Currency Transactions and Translations 2019). Normally the functional currency is the currency of the environment in which the company primarily generates and spends cash for example the U.S. dollar in the United States (A Roadmap to Foreign Currency Transactions and Translations 2019).

The primary issue with ASC 830 is that it has not changed significantly since it was first issued in 1981 (IAS 21 - The Effects of Changes in Foreign Exchange Rates 2012). When ASC 830 was first issued the United States and the U.S. dollar were dominating the global business environment. With the United States driving the global economy ASC 830 assumed that the reporting entity is located in the United States with the foreign entities being smaller, and almost all intercompany transactions flowing from the US to the foreign operations. In today’s modern business environment, many of the largest US reporting entities are holding companies with no significant operations; they hold operating companies in the United States as well as all around the world (IAS 21 - The Effects of Changes in Foreign Exchange Rates 2012). The US operating company may not be the reporting entity’s largest operating segment, and in many cases the foreign operations provide a substantial amount of support to US operations. Furthermore, transactions in today’s vastly connected global economy are often denominated in a number of different currencies. Determining functional currencies today is much more difficult than when ASC 830 was issued largely because an operation’s physical location no longer determines its functional currency (IAS 21 - The Effects of Changes in Foreign Exchange Rates 2012).

The determination of the functional currency is quite challenging and, in an attempt, to ease the process the Financial Accounting Standards Board has provided a list of indicators for management (Hoyle et al., 2017). It is worth noting that this list and the guidance given by the Financial Accounting Standards Board purposely left flexibility in the determination process to allow management to decide what the functional currency truly is. Monetary assets and liabilities, such as cash, accounts receivable, accounts payable, and long-term debt, create foreign currency exchange rate risk as they represent amounts (Summary of Statement No. 52, 2020). Monetary assets and liabilities are measured at the end of each reporting period based on the current exchange rates. This measurement can give rise to foreign currency gains and losses, which are recorded in the current period’s net income (Summary of Statement No. 52, 2020).

I realize we have all seen this chart in our textbook, but I believe that the indicators of what the functional currency should be is very crucial to the chapter and this discussion post. For this reason, I have provided a screenshot of the chart from our textbook.

 

(Hoyle et al., 2017)

 

Reference:

Deloitte. (2019). A Roadmap to Foreign Currency Transactions and Translations . Roadmap Series. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/Roadmaps/us-aers-a-roadmap-to-foreign-currency-transactions-and-translations.pdf.

Financial Accounting Standards Board. (2020). Summary of Statement No. 52. FASB, Financial Accounting Standards Board. . https://www.fasb.org/summary/stsum52.shtml.

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2017). Advanced accounting (13th ed.). Mcgraw-Hill Education.

IAS . (2012, July 19). IAS 21 - The Effects of Changes in Foreign Exchange Rates. IAS plus. . https://www.iasplus.com/en/standards/ias/ias21.