GM-Strasbourg (GMS) is a foreign subsidiary of GM, financed entirely by equity •
GMS has assets of € 50 cash •
The euro depreciates 10% against the dollar, moving from € 1.00=$1.00 to € 1.10=$1.00 Functional currency is USD If GMS is very tightly integrated into its parents operations thenits functional currency should be the same as its parent’s reporting currency (U.S. dollars). GMS’scash holding of 50 euros is therefore considered a foreign currency exposure. A depreciation of theeuro against the U.S. dollar reduces the value of GMS’s euro holdings: the € 50 that used to be worth$50 are now only worth $45. GM, as a consolidated entity, reports this on its income statement as a$5 foreign exchange loss. This reduction in net income flows through to the balance sheet reducingshareholder’s equity (retained earnings) by $5. Functional currency is the local currency If GMS is less tightly integrated into its