Register / Login

Consolidating Financial Statements: Determining the Functional Currency

Premium

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.

Unlock Premium Content

Upgrade your account to access the full article, downloads, and exercises.

You'll get access to:

Access complete tutorials and examples
Download source code and resources
Follow along with practical exercises
Get in-depth explanations

Previous Lesson

Current Rate Method for Translation of Foreign Statements

Translation Methods and Financial Statement Effects

Financial Reporting Part 2

30 lessons

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

Topics

Financial Analysis

Financial Statements

Related Groups

Finance Concepts