Search within this section
Select a section below and enter your search term, or to search all click Foreign currency
Favorited Content
2.3 Identifying distinct and separable operations
Publication date: 31 May 2022
us Foreign currency guide
To identify its distinct and separable operations, a reporting entity should start by analyzing the business purpose and activities of each legal entity, beginning at the lowest level of its legal structure, to determine whether each legal entity is a distinct and separable operation.
An entity might have more than one distinct and separable operation, such as a division or branch, in which case each operation may be considered a separate entity. If those operations are conducted in different economic environments, they might have different functional currencies.
An operation that is distinct and separable has each of the characteristics discussed in Figure FX 2-1.
Figure FX 2-1
Characteristics of a distinct and separable operation
Characteristics of a distinct and separable operation
Operation is distinct and separable |
Operation is not distinct and separable |
|
Separate operations
|
Operations are managed independently and can be separated, both operationally and for financial reporting purposes, from the reporting entity’s other operations
|
Operations are not managed independently or cannot be separated, either operationally or for financial reporting purposes, from the reporting entity’s other operations
|
Assets and liabilities
|
Assets and liabilities of the operation can be separated from those of the reporting entity’s other operations and relate directly to the operation’s activities
|
Assets and liabilities of the operation cannot be separated from those of the reporting entity’s other operations, the operation holds only certain assets and liabilities (e.g., receivables and inventory), or they hold assets and liabilities that relate directly to a reporting entity’s other operations
|
Financial statements
|
A meaningful set of all-inclusive financial statements could be routinely prepared for the operation
|
The operation cannot produce financial statements or produces a limited set of financial statements
|
A single legal entity might have more than one distinct and separable operation (e.g., a division or branch). In practice, a single legal entity composed of more than one distinct and separable operation occurs infrequently.
If multiple legal entities are domiciled in a country or countries with the same currency, a reporting entity should evaluate whether each legal entity should be considered a distinct and separable operation or if they should be combined with the other legal entities to form a single distinct and separable operation.
An operation does not have to be wholly-owned to be a distinct and separable operation; a joint venture or investment accounted for using the equity method can also be a distinct and separable operation. If an operation does not qualify as distinct and separable, it is considered an extension of another separate and distinct operation, often its most immediate parent.
Question FX 2-1
Is a foreign sales office a distinct and separable operation?
Is a foreign sales office a distinct and separable operation?
PwC response
Generally, no. A sales office is typically responsible for marketing and selling inventory produced by another operation. Further, sales offices usually rely on another legal entity or operation for funding, management oversight, and accounting. In those situations, the sales office would not be considered distinct and separable, but would instead be considered an extension of another distinct and separable operation (typically its most immediate parent).
2.3.1 Reassessment of distinct and separable operations
The determination of a reporting entity’s distinct and separable operations is not static. Management should periodically reassess its operations to determine if its previous conclusions are still valid. Also, certain events, such as mergers and acquisitions, or a reorganization of the reporting entity, may result in a change in whether an operation should be considered distinct and separable.
Question FX 2-2
Can a variable interest entity (VIE) consolidated by a reporting entity be a distinct and separable operation?
Can a variable interest entity (VIE) consolidated by a reporting entity be a distinct and separable operation?
PwC response
Yes. If a VIE consolidated by the reporting entity has the characteristics described in Figure FX 2-1, it can be a distinct and separable operation.
Once a reporting entity has identified its distinct and separable operations, it should identify the functional currency of each operation to determine whether it is a foreign entity or a domestic entity. See FX 3 for information on identifying a distinct and separable operation’s functional currency.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
