A4 Special issue

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  • #217430
    Amir Badawy
    Participant

    I don’t understand these two paragraphs as per attached
    Could you explain more details ?

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  • #217437
    Lynn Roden
    HOCK international

    Hi Amir Badawy,

    A foreign entity is an operation (a subsidiary, a division, a branch, a joint venture, etc.) whose financial statements are both (a) prepared in a currency other than the reporting currency of the reporting entity and (b) combined or consolidated with or accounted for on the equity basis in the financial statements of the reporting entity.

    A foreign entity’s currency of record is the currency it uses to do its accounting, keep its books, and prepare its financial statements.

    Functional currency is a term used to describe the currency of the primary economic environment in which a foreign entity operates. The parent company is the one who determines the functional currency of each of its foreign entities, because the functional currencies of its foreign entities are used when the parent consolidates the financial statements of the foreign entities with its own financial statements.

    The functional currency of a foreign entity is the currency in which the entity generates cash and expends cash. Functional currency is a matter of fact, although the determination of a foreign entity’s functional currency may require some professional judgment on the part of the parent company’s management. Your HOCK CMA Part 2 book gives several things to consider in determining the functional currency of a foreign entity, such as where the entity’s cash flows originate.

    Reporting currency is the currency the parent company uses to consolidate the foreign entity’s financial statements with its own (or to report the investment on the equity basis, if that is the appropriate way for the parent company to report its investment in the foreign entity) for external financial reporting.

    If the currency in which the foreign entity generates and expends cash is the same as the currency in which it keeps its books (its currency of record), then its currency of record and its functional currency will be the same. If the currency in which the foreign entity generates and expends cash is the same as the parent’s currency (the reporting currency), then its reporting currency and its functional currency will be the same. If the currency in which the foreign entity generates and expends cash is different from both its currency of record and its reporting currency, then its functional currency will be that third currency.

    If this information does not answer your questions, please tell me what it is you do not understand so I can be of more help to you.

    Lynn

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