Autotex Inc.

Abstract

Financial Accounting Standard (FAS) No. 52, “Foreign Currency Translation,” introduced the concept of functional currency. An entity's functional currency is defined as the currency of the primary economic environment in which it operates and generates cash flows. Under FAS No. 52, management has been provided with some flexibility in determining the functional currency for its foreign entities. Determination of the functional currency for a foreign entity is a very important decision because it dictates the translation method to be used. The two translation methods permitted under FAS No. 52 (current rate and temporal method-“remeasurement”) usually give rise to markedly different financial statement effects. While FAS No. 52 prescribes certain criteria to be used in determining the functional currency, the criteria prescribed are not definitive and leave considerable scope for subjective judgement. This case examines the functional currency choice decision, the various criteria that may be used to make the decision, and the possibility of arriving at different decisions as a result of the flexibility inherent in FAS No. 52. The case also illustrates the methodology for the current rate and the temporal method of translation and highlights the potential of obtaining significantly different results under the two methods.