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Running Head: ACCOUNTING: FUNCIONAL CURRENCY 0

Accounting: Functional Currency

Name

Southern New Hampshire University

December 10, 2019

Accounting: Functional Currency

1. To prompt transparency within an organization through financial reporting, the submission and availability of financial statements are critical. For companies that are performing at the international market, it is essential to provide the segment information as it crucial in influencing perceptions of the stakeholders in the market environment. Besides, the provision of financial information helps users to comprehensively deliberate on market performance and earning the capacity to foster their market position. In reference to the rate of exchange, it is a vital element that affects the business transactions of multinational companies.

The implication of forex rates is significant to the financial performance of a company. Also, fluctuations in exchange rates can be a result of the lack of fixed demand and supply of foreign currency in the foreign exchange market. Considering that multinationals’ financial performance is largely dependent on the dynamics of the foreign exchange market. There is extensive fluctuation implication on the financial statement and performance (Hoyle, Schaefer, & Doupnik, 2015).

Organizations operating in the foreign market ought to account for the results of their operations in reference to the functional currency following the guidelines of financial reporting. Following this premise, the fluctuation of exchange rates has great implications for financial statement developments. Once the results of financial statements are provided, it illustrates a typical average rate of exchange rates. Researches posit that remarkable fluctuation in the foreign exchange market rates can lead to intense implications on organizations’ fiscal performance and profitability (Corgel, Lane & Walls, 2013). The unpredictable implications on the fluctuation of foreign exchange could prompt either positive or negative effects on multinational companies. However, it is dependent on the currency that a transaction will be undertaken and designation on the direction which exchange rates take.

Methods for Translating Financial Statements

The organization performing on the international market and influenced by the dynamics of foreign exchange rates need to employ appropriate methods of translating financial statements. It is an important practice that allows reporting on foreign financial operations, especially in cases of transacting with different foreign currencies (Rambo, Main, & McQuilkin, 2019). Working in an international market, it is essential to accord the appropriate accounting standards to ensure consistency in the methodology for translating financial statements with the full intent of prompting timely and accurate financial reporting to ascertain precision and transparency in consideration of the prevailing economic situations. The current rate method refers to the exposition of equitable items with the exclusion of reserved financial earnings. Primarily, functional currency defines the currency of transaction in consideration of the market environment that a company is operating. The other applicable method is the temporal method, which involves the translation of income statements and balance sheets.

3. For a comprehensive definition demonstration of the translation process, the discussion provides hypothetical examples in reference to the methods mentioned above of financial statement translation. The hypothetical demonstration for “Current Rate” and “Temporal Method” are described in a spreadsheet attachment. To illustrate the Temporal Method, let's consider a New York subsidiary company operating in the global market that accepts dollars as the currency of the transaction. On the other hand, Current Rate methods can be hypothesized using the example of referring to the UK subsidiary company using the pounds. In this case, the assets and liabilities are influenced by the present “spot” rate of exchange in the prevailing market and the recorded date during the translation process.

References

Corgel, J. B., Lane, J., & Walls, A. (2013). How currency exchange rates affect the demand for U. S. hotel rooms [Electronic version]. Retrieved from Cornell University School of Hotel Administration http://scholarship.sha.cornell.edu/articles/651

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.

Rambo, R., Main, D., & McQuilkin, J. (2019). Hedging Recognized Foreign Currency Denominated Receivables or Payables. The Accounting Educators' Journal, 28.