Functional Currency Determination Case
10/10/2011
ABSTRACT In the dynamic global market, companies of all sizes, whether small, medium or transnationals interact with foreign companies and in most cases operate with currencies that are different from those that they commonly use. Foreign companies use foreign currencies for their expenditures, hedging strategies, and investing and financing activities. As a result these business activities must be reflected on the financial statements in the corporation’s reporting currency. FASB 52 and IAS 21 provide the appropriate guidance on the consideration of which functional currency should be implemented by the foreign subsidiaries. This case focuses in Sparkle a Nigerian subsidiary of a …show more content…

both companies made a loan) and Brighten sold machinery to Sparkle. Both operations may be seen as capitalization for the company to operate and within the next few years will be paid, since revenues are considerable, Sparkle, seems to have a bright future. To conclude the analysis of 2009, the debt in foreign currency, is less in proportion to that acquired in NGN as it represents 51.72% overall, however each of the parents represents a 24.14%. With the analysis of these factors can be concluded that: The NGN must be the functional currency of Sparkle. 2010 U.S. GAAP According to FASB 52 “An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash”. In line with this statement, Nigeria is the country where the main cash outlays of the company take place. On the other hand, a fact that is important to point is that the remaining profit are retained locally and not distributed to the parent. Further ACC 830-10-55-5 argues that “Cash flows related to the foreign entity’s individual assets and liabilities are primarily in the foreign currency and do not directly impact the parent company’s cash flows”. During 2010 there is a transaction between Bright and Shine, where the latter sells part of its shares to Brighten. This, all else equal, should not affect