Earlier this year, Alltime Company (headquartered in Kansas City, Missouri) acquired a small watch manufacturer in Berlin, Germany, that keeps its books in euros. (This is the first foreign direct investment made by Alltime.) The end of the fiscal year is approaching, and the company’s CFO is beginning to plan for the financial statement consolidation of the Germany subsidiary. The CFO has heard that she must determine the “functional currency” of the foreign subsidiary to be able to comply with U.S. GAAP, and she has asked you to provide her with answers to the following questions.

1. What is the functional currency of a foreign subsidiary?

2. Why must the functional currency of a foreign subsidiary be determined?

3. How is the functional currency of a foreign subsidiary determined?

Required

Draft a memorandum to the company’s CFO answering the preceding questions.