ACCOUNTING STANDARDS CASE 1—MORE THAN ONE FUNCTIONAL CURRENCY CPA skills Lynch C

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ACCOUNTING STANDARDS CASE 1—MORE THAN ONE FUNCTIONAL CURRENCY

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Lynch Corporation has a wholly owned subsidiary in Mexico (Lynmex) with two distinct and unrelated lines of business. Lynmex’s Small Appliance Division manufactures small household appliances such as toasters and coffeemakers at a factory in Monterrey, Nuevo Leon, and sells them directly to retailers such as gigantes throughout Mexico. Lynmex’s Electronics Division imports finished products produced by Lynch Corporation in the United States and sells them to a network of distributors operating throughout Mexico.

Lynch’s cfo believes that the two divisions have different functional currencies. The functional currency of the Small Appliance Division is the Mexican peso, whereas the functional currency of the Electronics Division is the U.S. dollar. The CFO is unsure whether to designate the Mexican peso or the U.S. dollar as Lynmex’s functional currency, or whether the subsidiary can be treated as two separate foreign operations with different functional currencies.

Source: FASB ASC 830-10-55-6 Foreign Currency Matters; Overall; Implementation Guidance and illustrations: The Functional Currency

ASC 830-10-55-6 states: “In some instances, a foreign entity might have more than one distinct and separable operation. For example, a foreign entity might have one operation that sells parent-entity-produced products and another operation that manufactures and sells foreign entity produced products. If they are conducted in different economic environments, those two operations might have different functional currencies. Similarly, a single subsidiary of a financial institution might have relatively self-contained and integrated operations in each of several different countries. In those circumstances, each operation may be considered to be an entity as that term is used in this Subtopic, and, based on the facts and circumstances, each operation might have a different functional currency.”

Required

Search current U.S. authoritative accounting literature to determine how the functional currency should be determined for a foreign entity that has more than one distinct and separable operation. Identify the source of guidance for answering this question

Explanation / Answer

As per guidance provided by ASC  830-10-55-6 the functional currency should be determined separately for each district and separable operation of a single foreign entity. Within its Mexican subsidiary, Lynch should designate the Mexican peso as the functional currency for the Small Appliance division and the U.S. dollar as the functional currency for the Electronics division.

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