ACCOUNTING STANDARDS CASE 2—CHANGE IN FUNCTIONAL CURRENCY CPA skills Hughes Inc.
ID: 2561780 • Letter: A
Question
ACCOUNTING STANDARDS CASE 2—CHANGE IN FUNCTIONAL CURRENCY
CPA
skills
Hughes Inc. has a wholly owned subsidiary in Canada that previously had been determined as having the Canadian dollar as its functional currency. Due to a recent restructuring, Hughes Inc.’s CFO believes that the functional currency of the Canadian company has changed to the U.S. dollar. A large cumulative translation adjustment related to the Canadian subsidiary is included in accumulated other comprehensive income on Hughes Inc.’s balance sheet. The CFO is unsure whether the cumulative translation adjustment should be removed from equity, and if so, to what other account it should be transferred. He also questions whether the change in functional currency qualifies as a change in accounting principle, which would require retrospective application of the temporal method in translating the Canadian subsidiary’s financial statements. He wonders, for example, whether the Canadian subsidiary’s nonmonetary assets need to be restated as if the temporal method had been applied in previous years.
Source of guidance: FASB ASC 830-10-45-10 Foreign Currency Matters; General; Other Presentation Matters; Functional Currency to reporting Currency
ASC 830-10-45-10 states; “If the functional currency changes from a foreign currency to the reporting currency, translation adjustments for prior periods shall not be removed from equity and the translated amounts for nonmonetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and subsequent periods.”
Required
Search current U.S. authoritative accounting literature for guidance on how to handle a change in functional currency from a foreign currency to the U.S. dollar. Summarize that guidance to answer the CFO’s questions. Identify the source of guidance for answering these questions.
Explanation / Answer
ASC 830-10-45-10 states: “If the functional currency changes from a foreign currency to the reporting currency, translation adjustments for prior periods shall not be removed from equity and the translated amounts for nonmonetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and subsequent periods.”
In essence, the authoritative guidance indicates that the change in functional currency from the Canadian dollar to the U.S. dollar should not be treated as a change in accounting principle with retrospective adjustments. Instead, the change should be handled prospectively with no adjustments made to the carrying amounts of nonmonetary assets or to the accumulated translation adjustment related to the Canadian subsidiary carried in AOCI (accumulated other comprehensive income).
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