The Financial Accounting Standards Board (FASB) in the U.S. uses what it calls a "functional currency approach" to differentiate among various intracorporate relationship scenarios and, on that basis, specify how financial statement translation must be done. The International Accounting Standards Board (IASB) uses a different approach, but the end result is usually identical. Basically,
A) If an operating affiliate is classified as a "self-sustaining foreign entity," in the absence of hyperinflation, its functional currency will be its local currency and translation will be done using the current rate method.
B) If the functional currency is neither the local currency nor the reporting currency (assume the U.S. dollar), then the local currency financial statements must be remeasured into the functional currency using the temporal method and then restated into the U.S. dollar (the reporting currency) using the current rate method.
C) If an operating affiliate is classified as an "integrated foreign entity," in the absence of hyperinflation, its functional currency will be the reporting currency (U.S. dollar) and translation will be done using the temporal method.
D) All of the statements above are correct.
E) Only statements a and c are correct.

Question

Quizplus · Accepted Answer

All the statements correctly describe the approaches to determining the functional currency and the subsequent translation or remeasurement of financial statements in international contexts. Statement A describes the treatment of a self-sustaining foreign entity using the current rate method. Statement B outlines the process when the functional currency is neither the local nor the reporting currency, involving remeasurement into the functional currency using the temporal method, followed by restatement into the reporting currency using the current rate method. Statement C explains the treatment of an integrated foreign entity, where its functional currency is the reporting currency, and translation is done using the temporal method.