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Sparkle Company Essay

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Case 11-4 SUBJECT: Determining the Functional Currency of Sparkle Company Sparkle Company is a Nigerian diamond mining company. Sparkle is a joint venture, 50 percent owned by Shine and 50 percent owned by Brighten. Both Shine and Brighten are U.S.-based companies with their functional currency being the American dollar. Sparkle Companies functional currency is that of Nigeria, being the Naira. During 2009, Sparkle had several transactions with its joint venture owners and outside parties. The details of Sparkle’s transactions are three loans, three expenditures, and one revenue stream. The loans the company took out were $1 million from Brighten, $1 million from Shine, and 300 million Naira from a local Nigerian bank. The expenditures …show more content…

Brighten has not made a determination as to whether the functional currency should change in 2010 because of the acquisition of the other 50 percent ownership share. According to IAS 21, functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. Taking this into consideration the functional currency for Sparkle during 2009 would be the US$ based on the given information for 2009 there are more cash transactions using the US$ than NGN. During 2010 under GAAP the functional currency for Sparkle would be the US$. According to FAS 52, A currency in a highly inflationary environment is not considered stable enough to serve as a functional currency and the more stable currency of the reporting parent is to be used instead. During 2010 under IFRSs, using IAS 21, the functional currency for Sparkle would be the US$ for 2010. Although Shine sold its share of the joint venture to Brighten the loan would be transferred and the amount of American currency to NGN would remain the same. 10-3 Case:

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