Managing Offshore Investments:Whose Currency?

The Offshore Investment Fund (OIF) was incorporated in Fairfield, Connecticut, for the sole purpose of permitting U.S. shareholders to invest in Spanish securities. The fund is listed on the New York Stock Exchange. The fund custodian may be the Shady Rest Bank and Trust Firm of Connecticut (“Shady Rest”), which eeps the fund’s accounts. The question of which currency to utilize in keeping the fund’s books arose at as soon as. Shady Rest ready the fund’s books in euros, because the fund was a country fund that invested solely in securities listed on the Madrid Stock Exchange. Subsequently, the fund’s auditors stated that, in their opinion, the functional currency should be the U.S. dollar. This case is depending on an actual occurrence. Names and country of origin have been changed to ensure anonymity.

Effects in the Decision

The choice to possibly adopt the U.S. dollar as the functional currency for the fund made considerable managerial headaches. For 1 factor, the perform of rewriting and reworking the accounting transactions was a monumental process that delayed the publication with the annual accounts. The concept in the functional currency was a foreign concept in Spain, as well as the effects of the functional currency selection were not created clear to the managers. Consequently, they continued to manage the fund until late in November without having appreciating the impact the currency selection had on the fund’s outcomes.

Additional difficulties caused by the functional currency option had been:

1. Shady Rest, with some $300 billion in different funds below management, still had not developed an sufficient multicurrency accounting method. Whereas accounting for a security acquisition would normally be recorded in a very simple bookkeeping entry, 3 entries had been now required. Additionally, payment for the buy itself could impact the revenue statement within the present period.


2. More serious issues related to day-to-day operations. When a transaction was initiated, the fund manager had no idea of its ultimate monetary effect. As an example, throughout the initial year of operations, the Fund manager was specific that his portfolio sales had generated a profit of additional than $1 million. When the sales lastly showed up inside the accounts, the transaction acquire was offset by currency losses of some $7 million!