Consider the following scenario: You have been promoted to the role of
controller at the Multi Co. holding company where you work. The
financial statements have been translated from using U.S. Generally
Accepted Accounting Principles (GAAP) to using International Financial
Reporting Standards (IFRS).
In your initial discussion post, explain how you would make your
financial comparison. Ensure you cover the term functional currency and
how it is determined. Also, address the following: If Multi Co. has a
subsidiary in a highly inflationary environment, what method would be
used under U.S. GAAP?
In response to at least two of your peers, compare and contrast your
initial post with theirs.
Response 1 – (JT)
Taking on the roll of the controller of a company is a big responsibility
to take on when being tasked to translate GAAP guideless to the
IFRS. The term functional currency is a term defined as the “main
currency” for the organization to run its business (Kenton, 2020). It’s
the act of having foreign currency reported as one on statements. I
think there should be an assessment done from a time period between
1 to 2 months just to see any differences in reporting. What can
determine a company’s functional currency is 2 categories it can be put
in: currency of the sales price of goods and currency of the cost of
sales with other expenses (Determining the functional currency:
Relevant considerations, 2020). When looking at hyper inflationary the
currency should be retained. But you need to know if what you have is
measured and calculated from the current rate of that period. It is
something that should be restated by the general price index and
translated into the current rate (6.3 Accounting for a foreign entity in a
highly inflationary economy, 2022). Under ASC 830 when the economy
is under hyper inflationary the statements should be remeasured from
the parent’s reporting currency were it is the functional currency (6.3
Accounting for a foreign entity in a highly inflationary economy, 2022).
Response 2 – (KR)
After transitioning from US GAAP to IFRS In my role as a controller at
Multi Co. I would need to understand the idea of functional currency
and how it affects financial comparisons. A subsidiary’s functional
currency is the currency utilized for day-to-day operations. It is
determined by factors such as where sales occur and where the firm
obtains financing. It is significant because it has an impact on how
transactions are recorded. When it comes to comparing financial
statements. I’d have to look for discrepancies between US GAAP and
IFRS accounting rules. I would need to ensure that the functional
currency of choice is accurately utilized when translating financial
statements and adhere to IFRS disclosure regulations which are
frequently more thorough. In high inflationary periods US GAAP uses
the current rate method and translates everything at the current
exchange rate and the changes go into shareholders’ equity to deal with
hyperinflation effects on non-monetary items.
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