CHAPTER 11
UNDERSTANDING THE ISSUES
1. If major cash inflows and/or outflows are
not denominated in the entity’s domestic
currency, this is a strong indicator that
another currency is the functional currency.
2. Because the French company’s functional
currency is the euro, it is not exposed to
risk associated with exchange rate changes
between the euro and the U.S. dollar (the
parent’s currency). Changes in the ex-
change rates will not have a current or
3. Because the euro is the subsidiary’s func-
tional currency, its financial statements will
4. In order for there to be a remeasurement
loss, the foreign currency (FC) would have
to weaken against the dollar (a strengthen-
ing dollar). The remeasurement loss would
be included in current-period earnings, and
the U.S. parent would want to hedge
remeasurement loss. Given a weakening
FC, an FC-denominated loan receivable
would not be an effective hedge of the net
investment in the subsidiary.
5. If a foreign entity’s functional currency is
highly inflationary, there is an assumption
order to overcome these unusual results,
two possible approaches have been
proposed. The first approach would adjust
tional currency (dollars).