Since all of our shares are owned entirely by U.S. investors, in addition to our corporate office being here in the United States, the company's functional currency for financial reporting purposes should be the U.S. dollar," proclaims timothy walker, the company's CEO, to the CFO, John Hara.
But Timothy, our Indian subsidiary's primary operating environment in India since we source our raw materials there, set out prices based on market conditions in India, and finances the operation from loans in Indian rupees obtained from local banks. That is why we must use the Indian rupee as our functional currency.
1. Do you agree with Mr. Walker or Mr. Hara? Explain.
2. What are the consequences to Mitra's reported income numbers of choosing the U.S. dollar or the Indian rupee as the functional currency of its Indian subsidiary? Do the auditors of Mitra Corporation have a role in the functional currency that the company chooses?
3. Given the facts of this case as the auditor, would you agree with Mr. Walker or Mr. hara?