ASC 830, IAS 21, Functional Currency, and the Temporal Method : – A Critique

In this paper, I argue that there is a bug in Generally Accepted Accounting Principles (both US and IFRS) which results in flawed financial statements. Fortunately, this bug is like a bad piece of SQL code – no effort is required to write new code to fix the bug, just delete the bad code.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)