Functional Currency Determination -Ifrs

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Case Study Analysis

Case 11-4 Functional Currency Determination — IFRS 2009: Sparkle Company is a Nigerian diamond mining company. (Nigerian currency is the Naira (NGN).) 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 US$ functional currency. This year, Sparkle had several transactions with its joint venture owners and outside parties. The details of Sparkle’s transactions are as follows: Loans    $1 million from Brighten. $1 million from Shine. NGN 300 million from a local bank.

Expenditures (per annum)    Labor — local — NGN 850 million. Other operating expenses — NGN 75 million. Machinery —$15 million (purchased solely from Brighten).

Revenues (per annum)   Sales in the United States —$35 million (80 percent of total sales revenue). 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.

In 2009 (on average): 1 US$ = 140 NGN 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$.

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Case 11-4: Functional Currency Determination - IFRS

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2010: Shine sold its share in the joint venture to Brighten. Though the loan was included in the sale, all other above mentioned factors remained consistent in 2010. Additional facts: 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 830-10-55-3 through 55-7...
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