Week 7 Discussion Post 1st Response:
Instructions: Respond to the post below from your fellow classmate. Any opinions, or anything you would like to add to discuss about their post. Must be three substantial paragraphs, and three references.
A functional currency is the currency used in the primary economic environment where an entity operates. This is the environment in which an entity primarily generates and expends cash. (Bragg, 2010)
All other currencies other than the functional currency are known as foreign currencies for the entity. Presentation currency is the currency in which the financial statements are presented to the investors. The entity is free to choose any currency as its presentation currency. (Subramani, 2011)
You should consider the following primary factors in determining an entity’s functional currency: (Bragg, 2010)
– The currency that primarily influences sales prices (usually the currency in which prices are denominated and settled)
– The currency of the country whose competition and regulations primarily influence sales prices
– The currency that primarily influences labor and other costs of goods sold (usually the currency in which prices are denominated and settled)
Less critical deciding factors are the currency in which an entity retains receipts from its operations and the currency in which debt and equity instruments are issued.
In making a determination of whether the functional currency of a foreign operation (e.g., a subsidiary, branch, associate, or joint venture) is the same as that of the reporting entity (parent, investor, etc.), certain additional considerations may also be relevant. These include: (Mackenzie, et.al, 2014)
1.Whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being executed more or less autonomously;
2. What proportion of the foreign operation’s activities is comprised of transactions with the reporting entity;
3. Whether the foreign operation’s cash flows directly impact upon the cash flows of the reporting entity, and are available for prompt remittance to the reporting entity; and
4. Whether the foreign operation is largely cash flow independent (i.e., if its own cash flows are sufficient to service its existing and reasonably anticipated debts without the injection of funds by the reporting entity).
Where an entity’s presentational currency differs from its functional currency, it should translate its results and financial position into the presentational currency. (Collings, 2014).
The difference between the presentation and functional currency should be stated, together with disclosure of the functional currency and the reason for using a different presentation currency. (van, 2006).
When an entity presents its financial statements in a currency that is different from its functional currency, the entity should describe the financial statements as complying with International Financial Reporting Standards (IFRS) only if they comply with all the requirements of each applicable Standard and interpretation. (van, 2006).
IAS 21 adopted the functional currency approach that requires the foreign entity to present all of its transactions in its functional currency. Translation is the process of converting transactions denominated in its functional currency into the investor’s presentation currency. If an entity’s transactions are denominated in other than its functional currency, the foreign transactions must first be adjusted to their equivalent functional currency value before translating to the presentation currency (if different than the functional currency). (Mackenzie, 2014)
The results and financial position of an entity whose functional currency is not the presentation currency should be translated into the presentation currency using: (van, 2006).
•The closing rate at the balance sheet date for all assets and liabilities
•The exchange rates at the dates of transactions for income and expenses. Approximate or average rates can be used for practical reasons
Bragg, S. M. (2010). The vest pocket guide to IFRS. ProQuest Ebook Central https://ebookcentral.proquest.com
Collings, S. (2014). Frequently asked questions in international standards on auditing. ProQuest Ebook Central https://ebookcentral.proquest.com
Krimpmann, A. (2015). Principles of group accounting under IFRS. ProQuest Ebook Central https://ebookcentral.proquest.com
Mackenzie, B., Coetsee, D., Njikizana, T., Selbst, E., Chamboko, R., Colyvas, B., & Hanekom, B. (2014). Wiley IFRS 2014 : Interpretation and application of international financial reporting standards. ProQuest Ebook Central https://ebookcentral.proquest.com
Subramani, R. V. (2011). Accounting for investments, volume 2: Fixed income securities and interest rate derivatives – a practitioner’s handbook. ProQuest Ebook Central https://ebookcentral.proquest.com
van, G. H. (2006). International financial reporting standards: A practical guide. ProQuest Ebook Central https://ebookcentral.proquest.com