ACCOUNTING STANDARDS CASE 1 – More than One Functional Currency

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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.

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. Note: There is one change to the required elements for
this assignment—for part B summarize “in your own words” the guidance
the FASB provides with respect to this issue.

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