Comparison between U.S. GAAP and International ... - Grant Thornton

Comparison between U.S. GAAP and International Financial Reporting Standards 129
IFRS
When the indicators are mixed and the functional currency
is not obvious, management uses judgement to determine
the functional currency. Management gives priority to the
primary indicators before considering the secondary
indicators (IAS 21.12).
Net investment in a foreign operation is the amount of the
reporting entity’s interest in the net assets of that
operation (IAS 21.8).
Monetary items are units of currency held and assets and
liabilities to be received or paid in a fixed or determinable
number of units of currency (IAS 21.8).
U.S. GAAP
basically a matter of fact, but in some instances the
observable facts will not clearly identify a single
functional currency. For example, if a foreign entity
conducts significant amounts of business in two or more
currencies, the functional currency might not be clearly
identifiable. In those instances, the economic facts and
circumstances pertaining to a particular foreign
operation shall be assessed in relation to the Board’s
stated objectives for foreign currency translation (see
ASC 830-10-10-1 through 10-2). Management’s
judgment will be required to determine the functional
currency in which financial results and relationships are
measured with the greatest degree of relevance and
reliability (ASC 830-10-45-6).
Unlike IFRS, U.S. GAAP does not include a hierarchy of
indicators to consider in determining the functional
currency of an entity (ASC 830-10-45-3). Instead, ASC
830-10-55-3 through 55-7 provide guidance for the
determination of the functional currency. The economic
factors cited in ASC 830-10-55-3 through 55-7, and
possibly others, should be considered both individually
and collectively when determining the functional
currency (ASC 830-10-55-3).
Translation adjustments result from the process of
translating financial statements from the entity’s
functional currency into the reporting currency. They are
disclosed and accumulated in a separate component of
consolidated equity (ASC Master Glossary, “Translation
Adjustments”).
Transaction gains or losses result from a change in
exchange rates between the functional currency and
the currency in which a foreign currency transaction is
denominated. They are generally included in
determining net income for the period in which
exchange rates change (ASC Master Glossary,
“Transaction Gain or Loss”).
Summary of the approach required
All entities
In preparing financial statements, each entity (whether a
stand-alone entity, an entity with foreign operations (such
as a parent) or a foreign operation (such as a subsidiary
or branch)) determines its functional currency in
accordance with IAS 21.9-.14 and then translates foreign
currency items into its functional currency and reports the
effects of such translation in accordance with
IAS 21.20-.37 and .50 (IAS 21.17).
Each individual entity included in the reporting entity
It is necessary for the results and financial position of
All entities
The assets, liabilities, and operations of a foreign entity
shall be measured using the functional currency of that
entity in accordance with ASC 830-10-55-3. A foreign
entity is defined as an operation (for example,
subsidiary, division, branch, joint venture, etc.) whose
financial statements (a) are prepared in a currency
other than the reporting currency of the reporting
enterprise and (b) are combined or consolidated with or
accounted for on the equity basis in the financial
statements of the reporting enterprise (ASC Master
Glossary, “Foreign Entity”).
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