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FC Determination Case Deloitte Cases
Functional Currency Determination Case
10/10/2011
ABSTRACT In the dynamic global market, companies of all sizes, whether small, medium or transnationals interact with foreign companies and in most cases operate with currencies that are different from those that they commonly use. Foreign companies use foreign currencies for their expenditures, hedging strategies, and investing and financing activities. As a result these business activities must be reflected on the financial statements in the corporation’s reporting currency. FASB 52 and IAS 21 provide the appropriate guidance on the consideration of which functional currency should be implemented by the foreign subsidiaries. This case focuses in Sparkle a Nigerian subsidiary of a joint venture formed by U.S. – based companies with US functional currency; This Company is assessing several factors that will be discussed in the following paragraphs to determine its functional currency.
Currency Determination Sparkle Company is a Nigerian diamond company owned by U.S. established companies, during 2009 had the subsequent transactions:
Loans: $1 million dollars from Brighten, $1 million from Shine and 300 million NGN.
Expenditures: 850 million NGN for labor and operating expenses for 75 million NGN. They also bought a $15 million machinery from Brighten.
Revenues: $8.75 million worldwide and $ 35 million in the U.S. U.S. laws govern the diamond trade worldwide and all sales are made in US dollars, also $1 US dollar is equivalent to 140 NGN that is the Nigerian currency. During the year 2010, Shine sold its share in the joint venture to Brighten. Where do these factors lead? Sparkle Company is involved in global transactions denominated in dollars. This Company operates in a global market regulated by the Central Selling Organization (CSO), whose headquarters are in Johannesburg, South Africa and the main market for diamonds in the world is located in Antwerp, Belgium.
Due to the highly regulated market,



References: Deloitte Touche Tohmatsu (2008). IFRS and U.S. GAAP A Pocket Comparison. Retrieved on November 7, 2011 from: http://www.iasplus.com/dttpubs/0809ifrsusgaap.pdf FASB (1981).Statement of Financial Accounting Standards No. 51. Retrieved on November 7, 2011 from: http://www.fasb.org/pdf/fas51.pdf IASB (2009). IAS 21 The effects of Changes in Foreign Exchange Rates. Retrieved on November 7, 2011 from: http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias21_en.pdf IASB (2009). IAS 29 Financial Reporting in Hyperinflationary Economies. Retrieved on November 7, 2011 http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias29_en.pdf International Monetary Fund (2011) Nigeria: Selected Issues. Retrieved on November 7, 2011 from: http://www.imf.org/external/pubs/ft/scr/2011/cr0865.pdf O’Connell, P. (2009). The Issue: De Beers’ Multifaceted Strategy. Retrieved on November7, 2011 from: http://www.businessweek.com/managing/content/jan2009/ca2009016_644338.htm

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