Question

Assume that Greene is investigating purchasing two overseas manufacturing companies that would be included in Greene’s consolidated financial statements as wholly owned subsidiaries. One company is located in New Zealand, and the other company is located in Spain. The CFO would like to know what factors need to be considered when determining the functional currency for the consolidated subsidiary. Research the Accounting Standards Codification to see what guidance is provided.

Answer 1

In order to determine the functional currency, you first need to consider the following set of primary factors:

• The currency in which the entity’s goods are priced or the sales revenues are collected.
• The currency of the country whose competitive forces and regulations most influence the price of the goods.
• The currency in which costs such as labour and materials are denominated and settled, or the currency that influences such costs.

If we can’t make a conclusion based on these, we need to consider the following secondary factors:

• The currency in which funds from financing activities (debt and equity) are generated.
• The currency in which receipts from operating activities are retained – ie, the currency in which the entity maintains its excess working capital balances.