General Thrust of FAS 52

The language of FAS 52 indicates that its authors didn't write it with direct reference to a situation like that of the Offshore Investment Fund, that's, a company that raises capital for the single purpose of investing it in a foreign country.

FAS 52 appears rather to be written from the viewpoint of an operating holding organization owning a separate, distinct foreign operating subsidiary.

FAS 52 defines the functional currency of an entity as the currency with the primary economic environment in which that entity operates. Had the fund been incorporated in Malta and, as a separate entity, borrowed the funds from its U.S. parent, use with the local currency would have been automatic. If substance is usually to prevail more than form, 1 ought to conclude that the euro need to nonetheless be applied.

Paragraph 6 of FAS 52 states, “for an entity with operations which are relatively self-contained and integrated inside a particular country, the functional currency frequently could be the currency of that country.” This statement reinforces the operational aspect that governs the choice in the functional currency; it is surely wrong to argue that the operations in the fund are conducted anywhere but in Spain.

Paragraph 8 reinforces the contention that “management’s judgment will likely be necessary to ascertain the functional currency in which monetary results and relationships are measured with the greatest degree of relevance and reliability.” Finally, paragraphs 80 and 81 draw an incredibly clear distinction that reinforces our (management’s) contention. Paragraph 80 reads:

Inside the initially class are foreign operations that happen to be relatively self-contained and integrated inside a specific country or economic atmosphere. The day-to-day operations aren't dependent upon the economic environment in the parent’s functional currency; the foreign operation mainly generates and expends foreign currenc . The foreign currency net cash flows that it generates may perhaps be reinvested and converted and distributed to the parent. For this class, the foreign currency is the functional currency.

This definition really should be contrasted with paragraph 81, which states: Inside the second class . . . the day-to-day operations are dependent on the economic environment in the parent’s currency, and the alterations inside the foreign entity’s individual assets and liabilities impact directly on the money flows of the parent firm in the parent’s currency. For this class, the U.S. dollar may be the functional currency. Since the purpose of single-country funds would be to create entities of the first instead of the second class, paragraph 80 precisely describes the operations of the Overseas Investment Fund.