2.10 Foreign Currency
The SEC staff’s comments on quantitative disclosures related to foreign currency
adjustments reflect published staff views5 on the topic, under which registrants should:
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“[R]eview management’s discussion and analysis and the notes to financial statements to ensure that disclosures are sufficient to inform investors of the nature and extent of the currency risks to which the registrant is exposed and to explain the effects of changes in exchange rates on its financial statements.”
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Describe in their MD&A “any material effects of changes in currency exchange rates on reported revenues, costs, and business practices and plans.”
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Identify “the currencies of the environments in which material business operations are conducted [when] exposures are material.”
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“[Q]uantify the extent to which material trends in amounts are attributable to changes in the value of the reporting currency relative to the functional currency of the underlying operations [and analyze] any materially different trends in operations or liquidity that would be apparent if reported in the functional currency.”
The SEC staff continues to closely monitor registrants’ disclosures related to foreign currency, and it may comment when such disclosures do not comply with U.S. GAAP or SEC rules and regulations.
2.10.1 Determination of Functional Currency
Examples of SEC Comments
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You disclose that the functional and reporting currency of the company is the U.S dollar, while also disclose that a substantial portion of your subsidiary’s expenses are paid in [Currency A]. Please tell us and revise if necessary what you consider to be the functional currency for your subsidiary. Refer to ASC 830-10-45-2, which requires that the assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity.
- You disclose that the U.S. dollar is your functional currency; however, we note that all of your current operations are outside of the U.S. Using the guidance in ASC 830-10-45 and ASC 830-10-55 please tell us how you determined your functional currency.
- Pursuant to ASC 830-10-45-2, please help us better understand how you determined that the U.S. dollar is the currency of the primary economic environment in which you operate and in which you primarily generate and expend cash. Please specifically address your consideration of ASC 830-10-55-3 through 55-5. We note that your disclosures . . . indicate that you have not generated any revenues in the U.S. and that all of your long-lived assets are located in [Country A].
Although ASC 830 states that an entity’s functional currency is “a matter of
fact,” sometimes it may not be clear what the functional currency is if, for
instance, “a foreign entity conducts significant amounts of business in two or
more currencies.” An entity may need to use significant judgment in determining
the functional currency, depending on the nature of the foreign entity being
evaluated. When a registrant conducts business in more than one currency, the
SEC staff often requests additional information regarding the judgments the
registrant used in determining its functional currency, particularly in light of
other potentially contradictory disclosures. In determining the appropriate
functional currency, management should consider each of the following economic
factors in ASC 830-10-55-5:
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Cash flow indicators.
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Sales price indicators.
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Sales market indicators.
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Expense indicators.
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Financing indicators.
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Intra-entity transactions and arrangements indicators.
2.10.2 Change in Functional Currency
Examples of SEC Comments
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Please address each indicator identified in ASC 830-10-55-5 and tell us whether it suggested [Currency A] or [Currency B] as your functional currency for your initial assessment versus the assessment adopted on [Date X], and how each indicator was weighted. Clarify the significant changed economic facts and circumstances underlying each changed indicator.
- We note your disclosure that “[Company A’s] functional currency changed to the United States dollar.” Please explain to us the facts and circumstances that resulted in the change in functional currency, including your consideration of each factor outlined in ASC 830-10-55-5.
- [W]e note that as a result of the Acquisition, you reevaluated your functional currency accounting conclusions. Due primarily to your new legal entity organization structure, global cash management and raw material sourcing strategies, you determined that the functional currency of certain subsidiaries operating outside of the United States is the local currency of the respective subsidiaries. For the Predecessor period, your reporting currency was the U.S. dollar as [Company B] management determined that the U.S. dollar was the functional currency of [Company B’s] legal entities and this functional currency was appropriate for [Company B’s] organizational legal entity structure and the economic environment in which [Company B] operated during the period covered by the Predecessor consolidated and combined financial statements. With reference to ASC 830-10-45-3 through 45-6, please provide a thorough analysis that demonstrates the appropriateness of the functional currency of your subsidiaries in both the Successor and Predecessor periods.
Because changes in functional currency are expected to be infrequent, the SEC staff will often ask for additional information about the facts and circumstances that resulted in such reported changes. Acquisitions or reorganizations may be circumstances in which an entity is required to reevaluate its functional currency determination. The economic factors in ASC 830-10-55-5, which are used in the initial determination of an entity’s functional currency, should be considered in the determination of whether there is a change in the entity’s functional currency. The SEC staff may ask a registrant to explain its consideration of each factor when there has been a change in functional currency.
Regardless of the underlying reason for a change in functional currency, the SEC
staff has indicated in published interpretations6 that although a registrant is not required to do so under ASC 830, it
“should consider the need to disclose the nature and timing of the change, the
actual and reasonably likely effects of the change, and economic facts and
circumstances that led management to conclude that the change was appropriate.”
In addition, the registrant should discuss in its MD&A the “effects of those
underlying economic facts and circumstances on the registrant’s business.” When
registrants fail to do so, the staff may issue comments requesting additional
disclosures about the underlying reason for the change and the associated
effects.
2.10.3 Translation Adjustments
Examples of SEC Comments
- Please revise your accounting policy disclosure to address how you account for the translation adjustments that result from the process of translating your financial statements from the [functional currency] to the [reporting currency]. Please refer to the guidance in ASC 830-30-45. Also disclose the impact of translation adjustments and include an analysis of the changes in the accumulated amount of translation adjustments. Please refer to the guidance in paragraphs 830-30-45-12 and 830-30-50-1.
- We note that foreign currency translations adjustments materially impacted the change in comprehensive income from [year 1] to [year 2]. Please expand your discussion and analysis to provide a comprehensive discussion and analysis of the foreign currencies and transactions that led to the adjustments recognized.
In accordance with ASC 830-30-45-21, any adjustments that result from the translation of an entity’s financial statements from its functional currency to the reporting currency should be recorded in OCI (i.e., such adjustments do not affect net income), and deferred taxes should be provided for the translation adjustments unless, as stated in ASC 740-30-25-17, “sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation.” Further, entities must disclose details of the changes in the cumulative translation adjustment. In accordance with ASC 830-30-45-18, this analysis can be presented (1) “[i]n a separate financial statement,” (2) “[i]n notes to financial statements,” or (3) “[a]s part of a statement of changes in equity.” Regardless of the format in which the analysis is provided, it must contain the items listed in ASC 830-30-45-20. If a registrant does not comply with this guidance, the SEC staff may ask the registrant to revise its disclosures accordingly.
2.10.4 Disclosures in MD&A, Including Risks and Uncertainties
Examples of SEC Comments
- We note that foreign currency exchange rates materially impacted your consolidated statements of income and consolidated statements of comprehensive income. Please expand your disclosure to provide the disclosures required by Item 305 of Regulation S-K, including a discussion of the specific foreign currency rate exposures that represent the primary risk of loss.
- We note your risk factor . . . related to the value of the currencies in countries where you operate against the U.S. dollar and its effect on your financial results reported in U.S. dollar terms. As such, fluctuations in foreign exchange rates could affect your financial results reported in U.S. dollar terms without giving effect to any underlying change in your business or results of operations. Please fully expand your discussion of results of operations to separately quantify for each period presented the amount of the change in revenues and expenses that is due to foreign currency translations.
The foreign operations of many registrants may be subject to material risks and uncertainties that should be disclosed, including those related to the foreign jurisdiction’s political environment, its business climate, currency, and taxation. The effects on a registrant’s consolidated operations of an adverse event related to these risks may be disproportionate in relation to the size of the registrant’s foreign operations. Therefore, the registrant’s segment information or MD&A may need to describe the trends, risks, and uncertainties related to its operations in individual countries or geographic areas and possibly supplement such disclosures with disaggregated financial information about those operations.
A registrant’s assessment of whether it needs to provide disaggregated financial information about its foreign operations in its MD&A would need to take into account more than just the percentage of consolidated revenues, net income, or assets contributed by foreign operations. The registrant also should consider how the foreign operations might affect the consolidated entity’s liquidity. For example, a foreign operation that holds significant liquid assets may have an exposure to exchange-rate fluctuations or restrictions that could affect the registrant’s overall liquidity.
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