A Case Study on Functional Currency Decision and Its Impact on Financial Reporting
Date Issued
2011
Date
2011
Author(s)
Hsu, Chao-Chin
Abstract
The increasing international capital market efficiency promoted by globalization intensifies the demand on comparable financial reporting among companies in differenent countries. IFRS was indetified as globally accepted financial reporting statndards given that all major economies have established time lines to converge with or adopt IFRSs in the near future. Financial Supervisory Commission of Taiwan also set the first phase of the adoption of IFRS Roadmap to go effective from 2013. Among the numerous differences between IFRSs and current ROC GAAP, fuctional currency was ranked the top priority of accounting issues to confront when adopting IFRSs by the Big Four internatiational audit firms. The research starts off with the comparison between IAS 21- 「The Effects of Changes in Foreign Exchange Rates」and SFAS 14-「Accounting for Foreign Currency Translation」, and focuses its concerns on how functional currency decision impacts on financial reporting and what to consider before decisions being made. In a case study of a notebook manufacturer, the impacts of functional currency on financial reporting were analyzed through the accounting rules of remeasurement, translation and expression. The study also suggests a company could consider its functional currency decision from the following internal and external prospectives:
Internally, a company should firstly determine its functional currency on the basis of the real economic of its business; then build up an integrated IFRS reporting system and flows from a group viewpoint; enable its IT system and data warehouse to support IFRSs reporting; redesign the managerial measures and reallocate resources; review the corporate finance strategies including hedging and funding; and, thoroughly study the investment and expansion strategies.
Externally, a company should take account of all the ongoing regulation and mandate modifications by the authorities, which include financial report declaration, discrepancies between corportate tax and financial reports, earnings recognition and distribution, foreign exchange regulations and etc. Moreover, the selections made by peer group could serve as reference points to the company’s functional currency decision.
Subjects
IFRS
IAS 21
SFAS 14
functional currency
fair value
Type
thesis
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