You are on the accounting staff at Jeff Pong Company. Jeff Pong is based in California and has recently acquired a subsidiary, Mak Hung Enterprises, located in Guangzhou, China. The board of directors of Jeff Pong is curious about how the Chinese currency (yuan) financial statements of Mak Hung will be consolidated with Jeff Pong’s U.S. dollar financial statements. Yesterday, your boss, the controller, made a presentation to the board explaining the adjustments that will be made to Mak Hung’s financial statements to restate them from IFRS to U.S. GAAP.
The controller has asked you to write a memo to the board explaining how the yuan financial statements, once restated to be in conformity with U.S. GAAP, will be converted into U.S. dollars. The controller has decided that Mak Hung’s functional currency is the yuan. Make sure you explain to the board what a functional currency is, how it is determined, and what implications it has for the way financial statements are converted into U.S. dollars.