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The guidance codified in ASC 830 has not changed significantly since its issuance in 1981. At that time, the US and the US dollar dominated the global business environment. The international operations of US reporting entities were typically extensions of large, established US operating companies, and “foreign entities” were generally much smaller than the operations in the US. In addition, almost all intercompany transactions flowed from the US to foreign operations. Because of this historical bias, the guidance in ASC 830 assumes that the reporting entity is located in the US, uses the US dollar as its reporting currency, is an operating company with a functional currency of the US dollar, and provides support to its foreign operations. Figure FX 1-2 illustrates the operating structure assumed by the guidance in ASC 830.
Figure FX 1-2
Operating structure assumed by ASC 830
In today’s economy, many US reporting entities are holding companies with no significant operations; they hold operating companies in the United States and around the world. The US operating company may not be the reporting entity’s largest operating company, and in many cases the foreign operations provide support to the US operations. In addition, transactions in the modern economy may be denominated in a number of global currencies, and an operation’s physical location no longer determines its functional currency. For example, a reporting entity domiciled in Canada may conduct most of its business in the US dollar, while a reporting entity domiciled in the US may conduct most of its business in the Canadian dollar. As a result, determining functional currencies today is much more difficult than when ASC 830 was issued.
Figure FX 1-3 shows an example of a more current operating structure.
Figure FX 1-3
Typical current operating structure (2022)
While accounting for foreign currency matters has always been a challenging area that often requires significant judgment, the lack of clarity surrounding how to apply ASC 830 to a modern operating structure and how the definitions and units of account within ASC 830 interact with subsequently issued accounting standards has increased the challenges. To assist in understanding how ASC 830 should be applied today, we have developed additional terms (such as domestic entity) that are not used in ASC 830. In certain places we have included explanations to clarify the ASC references.
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