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Factors in Determining The Functional Currency (US GAAP)

The document outlines factors to consider when determining a company's functional currency according to ASC 830-10-55-5. It lists 6 categories of economic factors: 1) cash flow, 2) sales price, 3) sales market, 4) expense, 5) financing, and 6) intra-entity transactions and arrangements. Under each category it describes two indicators, one pointing towards the foreign currency and one pointing towards the parent company's currency as the functional currency. The document instructs to consider these various factors both individually and collectively when evaluating which currency is most representative of an entity's primary economic environment.

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Miguel Lopez Acosta
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84 views

Factors in Determining The Functional Currency (US GAAP)

The document outlines factors to consider when determining a company's functional currency according to ASC 830-10-55-5. It lists 6 categories of economic factors: 1) cash flow, 2) sales price, 3) sales market, 4) expense, 5) financing, and 6) intra-entity transactions and arrangements. Under each category it describes two indicators, one pointing towards the foreign currency and one pointing towards the parent company's currency as the functional currency. The document instructs to consider these various factors both individually and collectively when evaluating which currency is most representative of an entity's primary economic environment.

Uploaded by

Miguel Lopez Acosta
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Factors in determining the functional currency

ASC 830-10-55-5 states the following economic factors, and possibly others, should be considered both
individually and collectively when determining the functional currency:

I.- Cash flow indicators

1. Foreign currency. Cash flows related to the foreign entity’s individual assets and liabilities are
primarily in the foreign currency and do not directly affect the parent entity’s cash flows.

2. Parent’s currency. Cash flows related to the foreign entity’s individual assets and liabilities directly
affect the parent’s cash flows currently and are readily available for remittance to the parent entity.

II.- Sales price indicators

1. Foreign currency. Sales prices for the foreign entity’s products are not primarily responsive on a short-
term basis to changes in exchange rates but are determined more by local competition or local
government regulation.

2. Parent’s currency. Sales prices for the foreign entity’s products are primarily responsive on a short-
term basis to changes in exchange rates; for example, sales prices are determined more by worldwide
competition or by international prices.

III.- Sales market indicators

1. Foreign currency. There is an active local sales market for the foreign entity’s products, although there
also might be significant amounts of exports.

2. Parent’s currency. The sales market is mostly in the parent’s country or sales contracts are
denominated in the parent’s currency.

IV.- Expense indicators

1. Foreign currency. Labor, materials, and other costs for the foreign entity’s products or services are
primarily local costs, even though there also might be imports from other countries.

2. Parent’s currency. Labor, materials, and other costs for the foreign entity’s products or services
continually are primarily costs for components obtained from the country in which the parent entity is
located.
V.- Financing indicators

1. Foreign currency. Financing is primarily denominated in foreign currency, and funds generated by the
foreign entity’s operations are sufficient to service existing and normally expected debt obligations.

2. Parent’s currency. Financing is primarily from the parent or other dollar-denominated obligations, or
funds generated by the foreign entity’s operations are not sufficient to service existing and normally
expected debt obligations without the infusion of additional funds from the parent entity. Infusion of
additional funds from the parent entity for expansion is not a factor, provided funds generated by the
foreign entity’s expanded operations are expected to be sufficient to service that additional financing.

VI.- Intra-entity transactions and arrangements indicators

1. Foreign currency. There is a low volume of intra-entity transactions and there is not an extensive
interrelationship between the operations of the foreign entity and the parent entity. However, the
foreign entity’s operations may rely on the parent’s or affiliates’ competitive advantages, such as
patents and trademarks.

2. Parent’s currency. There is a high volume of intra-entity transactions and there is an extensive
interrelationship between the operations of the foreign entity and the parent entity. Additionally, the
parent’s currency generally would be the functional currency if the foreign entity is a device or shell
corporation for holding investments, obligations, intangible assets, and so forth, that could readily be
carried on the parent’s or an affiliate’s books.

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