Question

Lynch Corporation has a wholly owned subsidiary in Mexico (Lynmex) with two distinct and unrelated lines of business. Lynmex’s Small Appliance Division manufactures small household appliances such as toasters and coffeemakers at a factory in Monterrey, Nuevo Leon, and sells them directly to retailers such as Gigantes throughout Mexico. Lynmex’s Electronics Division imports finished products produced by Lynch Corporation in the United States and sells them to a network of distributors operating throughout Mexico.

Lynch’s CFO believes that the two divisions have different functional currencies. The functional currency of the Small Appliance Division is the Mexican peso, whereas the functional currency of the Electronics Division is the U.S. dollar. The CFO is unsure whether to designate the Mexican peso or the U.S. dollar as Lynmex’s functional currency, or whether the subsidiary can be treated as two separate foreign operations with different functional currencies.

Required

Search current U.S. authoritative accounting literature to determine how the functional currency should be determined for a foreign entity that has more than one distinct and separable operation. Identify the source of guidance for answering this question

Answer 1

ASC 830-10 pro­vides general guid­ance on foreign cur­rency issues, in­clud­ing guid­ance on de­ter­min­ing "how a re­port­ing entity de­ter­mines the func­tional cur­rency of a foreign entity (in­clud­ing of a foreign entity in a highly in­fla­tion­ary economy), re­mea­sures the books of record (if nec­es­sary), and char­ac­ter­izes trans­ac­tion gains and losses."
830-20 Foreign Cur­rency Trans­ac­tions
ASC 830-20 notes the fol­low­ing:

This Subtopic es­tab­lishes stan­dards of fi­nan­cial ac­count­ing and re­port­ing for foreign cur­rency trans­ac­tions in fi­nan­cial state­ments of a re­port­ing entity.
Foreign cur­rency trans­ac­tions may produce re­ceiv­ables or payables that are fixed in terms of the amount of foreign cur­rency that will be re­ceived or paid. Ex­am­ples include a sale de­nom­i­nated in Swiss francs, a Swiss franc loan, and the holding of Swiss francs by an entity whose func­tional cur­rency is the dollar. Like­wise, a Swiss franc de­nom­i­nated trans­ac­tion by a German entity or other entity whose func­tional cur­rency is not the Swiss franc is a foreign cur­rency trans­ac­tion. For any entity whose func­tional cur­rency is not the dollar, a dol­lar-de­nom­i­nated trans­ac­tion is also a foreign cur­rency trans­ac­tion.
830-30 Trans­la­tion of Fi­nan­cial State­ments
ASC 830-30 notes the fol­low­ing:

This Subtopic pro­vides guid­ance for trans­lat­ing foreign cur­rency state­ments that are in­cor­po­rated in the fi­nan­cial state­ments of a re­port­ing entity by con­sol­i­da­tion, com­bi­na­tion, or the equity method of ac­count­ing.
830-230 State­ment of Cash Flows
ASC 830-230 dis­cusses guid­ance on in­clud­ing foreign cur­rency matters in an entity's state of cash flows.
830-740 Income Taxes
ASC 830-740 notes the fol­low­ing:

This Subtopic ad­dresses the ac­count­ing for spe­cific types of basis dif­fer­ences for en­ti­ties op­er­at­ing in foreign coun­tries. The ac­count­ing ad­dressed in this Subtopic is limited to the de­ferred tax ac­count­ing for changes in tax or fi­nan­cial re­port­ing bases due to their re­state­ment under the re­quire­ments of tax laws or gen­er­ally ac­cepted ac­count­ing prin­ci­ples (GAAP) in the United States. These changes arise from tax or fi­nan­cial re­port­ing basis changes caused by any of the fol­low­ing:

Changes in an entity’s func­tional cur­rency
Price-level related changes
A foreign entity’s func­tional cur­rency being dif­fer­ent from its local cur­rency.

This Subtopic ad­dresses whether these changes, which can affect the amount of basis dif­fer­ences, result in recog­ni­tion of changes to de­ferred tax assets or li­a­bil­i­ties.