ASC 830, IAS 21, Functional Currency and the Temporal Method of Remeasurement - a Critique

Abstract

I argue that the concept of “functional currency” is a false construct, developed by accountants in response to a misunderstanding of the nature of currency exchange rate movements. That the only relevant currency to a foreign subsidiary are the currency of its books (“Local currency”) and the currency of its parent’s books (“Reporting” or “Presentation” currency) and nothing else. As such, foreign subs should always employ the “Current Rate Method” (of “Translation”; a word synonymous with this method) and restate from: Local > Reporting, skipping the requirement of “determinizing functional currency” and dropping the requirement of “remeasuring” from: Local > Functional (if needed…) before “translating” to Reporting (if needed). I argue that the “Temporal Method” (of “Remeasurement”, a word synonymous with this flawed method) from the Local Currency into the (nonsensical) “Functional Currency” requires the employment of illogical restatement rules (specifically the rule of holding “non-monetary assets and liabilities” at irrelevant “Hist” FX rates [or “prices”]), and results in spurious (i.e. not “real” in an economic sense) FX gains and losses in the financial statements of the (post-“Remeasured”) subsidiary, undermining earnings-quality of the parent (after consolidation), and misrepresenting both equity and assets* of the foreign sub (and therefore of the consolidated entity as well).