Consolidating Financial Statements: Determining the Functional Currency
When consolidating a foreign subsidiary's financial statements with those of the parent company, the correct identification of the subsidiary's functional currency is critical.
Commonly the subsidiary's functional currency is the local currency, but sometimes the functional currency is the parent's reporting currency or some third currency.
Selected IFRS Guidance for Determining the Functional Currency:
The subsidiary's functional currency is the currency that influences sales prices.
The subsidiary's functional currency is the currency of the country whose regulations and competitive structure influences sales prices.
Selected GAAP Guidance for Determining Functional Currency:
When the subsidiary is a relatively self-contained, independent business operation, operating primarily in local markets, then the local currency is the functional currency.
When the subsidiary is heavily integrated with the parent company and it serves as sales outlet type function for the parent, then the subsidiary's functional currency is the parent's reporting currency.
While GAAP and IFRS require certain disclosures regarding the treatment of foreign currency when consolidating multinational operations, parent company management retains some discretion in determining the functional currency. A well trained financial analyst must be aware that two companies in the same industry may use different translation methods. For comparability purposes, it is recommended to move all translation adjustments to equity from the balance sheet to the income statement.
- CFA Level 2: Financial Reporting Part 2 – Introduction
- Intercorporate Investments Accounting - Ownership Categories
- Minority Passive Investments – Accounting Classes
- Minority Active Investments and the Equity Method for Financial Reporting
- Joint Venture Investments
- Controlling Interest Investments: Accounting for Business Combinations
- Purchase Method of Accounting for Controlling Interest Investments or Acquisitions
- Pooling of Interests Method to Account for Controlling Interest Investments
- Purchase Method vs. Pooling of Interest Method
- Acquisition Method to Account for Controlling Interest Investments
- GAAP Purchase Method, IFRS Purchase Method, and GAAP Acquisition Method Accounting
- Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs)
- Defined Benefits Plans vs. Defined Contribution Plans
- Measuring the Defined Benefit Obligation
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet
- The Role of Actuarial Assumptions in DB Plan Accounting
- Economic Pension Expense
- Pensions and the Statement of Cash Flows
- Accounting for Stock (or Share) Based Compensation
- Financial Statement Consolidation of Multinational Operations
- Consolidation: Presentation Currency vs. Functional Currency vs. Local Currency
- Foreign Currency Translation
- Temporal Method for Translation of Foreign Statements
- Current Rate Method for Translation of Foreign Statements
- Consolidating Financial Statements: Determining the Functional Currency
- Translation Methods and Financial Statement Effects
- Accounting for Subsidiaries in Hyperinflationary Economies
- CFA Level 2: Financial Reporting 2 - Recommendations
- MBS Weighted Average Life