Case 11-4

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Case 11-4
SUBJECT: Determining the Functional Currency of Sparkle Company Sparkle Company is a Nigerian diamond mining company. Sparkle is a joint venture, 50 percent owned by Shine and 50 percent owned by Brighten. Both Shine and Brighten are U.S.-based companies with their functional currency being the American dollar. Sparkle Companies functional currency is that of Nigeria, being the Naira. During 2009, Sparkle had several transactions with its joint venture owners and outside parties. The details of Sparkle’s transactions are three loans, three expenditures, and one revenue stream. The loans the company took out were $1 million from Brighten, $1 million from Shine, and 300 million Naira from a local Nigerian bank. The expenditures for 2009 included 850 million Naira on local labor, 75 million Naira on operating expenses, and $15 million on machinery. The revenue streams for the current period for Sparkle are $35 million in sales within the United States, which equals 80 percent of total sales. According to the joint venture agreement, all sales proceeds are retained by Sparkle as long as control is equally divided between Shine and Brighten. Direct sales transactions with Shine and Brighten are considered to be relatively small. During 2009 the exchange rate was 1US$ to 140NGN. Intragroup transactions were denominated in the functional currency of the joint venture. Sparkle has a strong Nigerian management team and an experienced ex-Brighten managing director. U.S. laws govern the diamond trade worldwide and all sales are made in US$. In 2010 Shine sold its share in the joint venture to Brighten. Though the loan was included in the sale, all of the other mentioned factors remained consistent in 2010. Brighten is considering the accounting implications of switching from U.S. GAAP to IFRSs at the end of fiscal year 2010. Comparative financial statements would include fiscal year 2009. In 2009, on the basis of its consideration of the factors in ASC...
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