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FRA Multinational Operations

For current method, is functional currency = foreign currency? I am getting confused with the terminology. When they say the foreign currency has appreciated, they mean the functional currency has appreciated? So that will increase the net asset exposure?

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No, Functional currency is the currency of the primary market the company operates in (where it primarily generates its revenue). Presentation currency is the reporting currency of the company (currency used in its annual report and accounts).

It’s more of the other way around. I’ll walk through an example:

The parent company is a U.S. domiciled company and its local currency (and thus presentation currency because it is the parent company) is the USD. The U.S. domiciled company has a subsidiary in Canada and its local currency is the CAD. If the subsidiary’s functional currency is the CAD (aka it sells goods in CAD, most of its expenses are in CAD, etc.), then the current rate method is used because the functional currency and the local currency are the same.

If the Canadian subsidiary’s functional currency were the USD, then the function currency is the presentation currency. Thus the temporal method would be used, not the current method.

Thanks for the explanation! I understand how to choose current or temporal method but I get confused with the term foreign currency strengthened. In both cases (Current and Temporal), the foreign currency is the subsidiary’s currency? So in the example you have stated, regardless of the method we use, CAD will be the foreign currency? 

Another question related to this. Inventory can be stated at

1. historical or

2. lower of cost or market value

When it is stated at historical, then we use weighted avg. rate for the year. 

What do we do when lower of cost or market value is used?

Taycfa wrote:

Thanks for the explanation! I understand how to choose current or temporal method but I get confused with the term foreign currency strengthened. In both cases (Current and Temporal), the foreign currency is the subsidiary’s currency? So in the example you have stated, regardless of the method we use, CAD will be the foreign currency? 

Yes, that is correct, in the context of the case/vignette, the first step should be to figure out what the local (foreign) currency of the subsidiary is.

Taycfa wrote:

Another question related to this. Inventory can be stated at

1. historical or

2. lower of cost or market value

When it is stated at historical, then we use weighted avg. rate for the year. 

What do we do when lower of cost or market value is used?

Under the current method, whether inventory is reported as cost or market is irrelevant. Current rate is used in either case.

Under the temporal method, if inventory is reported at cost, it is considered a non-monetary asset and thus translated using the weighted average rate for the year. If inventory is reported at market value, it is considered a monetary asset and thus translated using the current rate.

Ok great thanks!