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2.4 Application examples
Publication date: 31 May 2022
us Foreign currency guide
Example FX 2-1 illustrates how to identify distinct and separable operations when a reporting entity has multiple subsidiaries.
Example FX 2-2 illustrates how to identify distinct and separable operations when a reporting entity has multiple foreign entities within a single country.
Example FX 2-3 illustrates how to identify distinct and separable operations within a single legal entity.
EXAMPLE FX 2-1
Reporting entity with multiple subsidiaries
Reporting entity with multiple subsidiaries
USA Corp is a US registrant that uses the US dollar as its reporting currency. USA Corp has the following subsidiaries:
Mexico SA – Located in Tijuana, Mexico, Mexico SA is a wholly-owned subsidiary of USA Corp. Mexico SA serves as a regional headquarters. It has a factory that produces products that are sold in Mexico and Latin America, and two warehouses to hold products. Mexico SA has a general manager and management team that are responsible only for Mexico SA operations and who are compensated based on Mexico SA’s performance. Mexico SA also has the accounting systems necessary to process financial transactions and to prepare financial statements.
Canadian Sales LLC – Located in Montreal, Canada, Canadian Sales LLC is a wholly-owned subsidiary of USA Corp. Canadian Sales LLC markets and sells the products produced by USA Corp to Canadian customers in Canadian dollars. Canadian Sales LLC relies on USA Corp for its funding, management, and financial reporting function. USA Corp manages its sales divisions in the US and internationally as a single operation. Canadian Sales LLC reports limited financial information in its local currency, the Canadian dollar.
What are USA Corp’s distinct and separable operations?
Analysis
USA Corp has two distinct and separable operations: USA Corp and Mexico SA. Canadian Sales LLC should be considered an extension of USA Corp.
EXAMPLE FX 2-2
Reporting entity with multiple foreign entities within a single country
Reporting entity with multiple foreign entities within a single country
USA Corp is a US registrant that uses the US dollar as its reporting currency. USA Corp operates fast food restaurants in the US and in various other countries.
USA Corp owns 100% of five separate legal operating entities, each operating a fast food restaurant in Berlin, Germany. All of the operating entities are under the supervision of one regional vice president and finance team. The German fast food market is very different than the US fast food market; therefore, there is a separate team to establish strategy and menus for all German entities due to differences in customer tastes between Germany and the United States.
Each German operating entity pays for all purchases of inventory and equipment, salaries, and other expenses in the local currency, the euro. Each operating entity submits its financial information to the regional finance team, who prepares individual and combined financial statements.
Do the wholly-owned legal entities in Germany represent distinct and separable operations?
Analysis
The operations of the five wholly-owned legal entities in Germany are distinct and separable from USA Corp because they comprise an operation that is separate, both operationally and for financial reporting purposes, from USA Corp. However, the operating entities are not individually distinct and separable from each other because although they may have separable assets and liabilities and are able to prepare financial statements, they are not operated separately. In addition, strategy, menu, and pricing are established centrally for all of the operating entities.
EXAMPLE FX 2-3
One legal entity disaggregated into two distinct and separable operations
One legal entity disaggregated into two distinct and separable operations
USA Corp is a US registrant that uses the US dollar as its reporting currency. USA Corp has a wholly-owned subsidiary located in Canada. Canadian Corp operates a single manufacturing facility with two production lines. The production lines manufacture similar products, but the output is directed to different markets.
Product US – Product US is produced solely for USA Corp. USA Corp provides all of the production plans and product specifications to be used for Product US. Most of the raw materials used in producing Product US are purchased from USA Corp, in US dollars; some minor inputs are purchased locally in Canadian dollars. All sales contracts for Product US are negotiated with USA Corp in US dollars such that Canadian Corp recovers its cost plus a margin designed to be similar to that of a contract manufacturer.
Product C – Product C is produced solely for Canadian customers. Canadian Corp has a team of engineers that design the specifications for Product C based on the demands of the Canadian marketplace. Production plans are based on the expected sales projected by Canadian Corp’s sales team. Raw materials are purchased equally from US vendors, in US dollars, and Canadian vendors, in Canadian dollars. Pricing for Product C is in Canadian dollars and is based on local demand.
Canadian Corp has separate management teams for each product, and routinely prepares a complete set of financial statements for each product.
Does Canadian Corp represent a single distinct and separable operation?
Analysis
Although Canadian Corp is a single legal entity, because the business of Product US and Product C are clearly separate, both operationally and for financial reporting purposes, they should be evaluated separately.
The Product US “operation” is an extension of USA Corp’s operations; it is the manufacturing arm of USA Corp. It produces a product designed by USA Corp to be sold only in the US. The Product C “operation” is a distinct and separable operation that operates predominantly in the Canadian dollar and produces a distinct product designed for Canadian tastes and is priced based on the Canadian market.
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.
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