Offshore Investments
CASE: Managing Offshore Investments: Who’s Currency?1
The Offshore Investment Fund (OIF) was incorporated in Fairfield, Connecticut, for the sole purpose of allowing U.S. shareholders to invest in Maltese securities. The Fund is listed on the New York Stock Exchange. The custodian of the Fund is the Shady Rest Bank and Trust Company of Connecticut (“Shady Rest”), which keeps the accounts of the Fund. The question very quickly arose as to the currency in which the books of the fund were to be kept. Shady Rest commenced writing up the books of OIF in Maltese lira, since the fund was a country fund that invested solely in listed securities on the Malta Stock Exchange. Subsequently, the Funds’ auditors, Big-Four, stated that, in their opinion, the functional currency should more properly by the U.S. dollar.
Effects of the Decision
The decision to adopt the U.S. dollar as the functional currency for the Fund created considerable managerial headaches. For one thing, the work of rewriting and reworking the accounting transactions was a monumental task which delayed the publication of the annual accounts. The concept of the functional currency was a foreign notion in Malta, and the effects of the functional currency choice were not clarified to the managers. Consequently, they continued to manage the Fund until late in November without an appreciation of the impact the currency choice had on the Fund’s results.
Additional difficulties caused by the functional currency choice:
a. Shady Rest, having some $300 billion in various Funds under management, still had not developed an adequate multicurrency accounting system. Whereas accounting for a security acquisition would normally be recorded in a simple bookkeeping entry, three entries were now required. In addition, payment for the purchase itself could impact the income statement in the current period.
b. More serious problems related to day-to-day operations. AT the time a transaction is initiated, the
The Offshore Investment Fund (OIF) was incorporated in Fairfield, Connecticut, for the sole purpose of allowing U.S. shareholders to invest in Maltese securities. The Fund is listed on the New York Stock Exchange. The custodian of the Fund is the Shady Rest Bank and Trust Company of Connecticut (“Shady Rest”), which keeps the accounts of the Fund. The question very quickly arose as to the currency in which the books of the fund were to be kept. Shady Rest commenced writing up the books of OIF in Maltese lira, since the fund was a country fund that invested solely in listed securities on the Malta Stock Exchange. Subsequently, the Funds’ auditors, Big-Four, stated that, in their opinion, the functional currency should more properly by the U.S. dollar.
Effects of the Decision
The decision to adopt the U.S. dollar as the functional currency for the Fund created considerable managerial headaches. For one thing, the work of rewriting and reworking the accounting transactions was a monumental task which delayed the publication of the annual accounts. The concept of the functional currency was a foreign notion in Malta, and the effects of the functional currency choice were not clarified to the managers. Consequently, they continued to manage the Fund until late in November without an appreciation of the impact the currency choice had on the Fund’s results.
Additional difficulties caused by the functional currency choice:
a. Shady Rest, having some $300 billion in various Funds under management, still had not developed an adequate multicurrency accounting system. Whereas accounting for a security acquisition would normally be recorded in a simple bookkeeping entry, three entries were now required. In addition, payment for the purchase itself could impact the income statement in the current period.
b. More serious problems related to day-to-day operations. AT the time a transaction is initiated, the