Question

Magruder company is a domestic company and owns 100% of the stock of Hyacinth company. Magruder’s functional currency is the USD. Hyacinth is also a domestic company and files a consolidated income tax return with its parent, Magruder. Hyacinth conducts business in France and uses the French franc as it functional currency. Magruder generates net income of $1,000,000 in 2017 and Hyacinth generates income of 200,000 in French francs.

What is qualified business unit(QBU) and why is the designation of being a QBU relevant for purpose of determining the functional currency?

Answer 1

Qualified Business Unit is separate unit of trade or business of an Enterprise,also called a subdivision, which maintains separate books and accounts, and computes separate Profit and Loss, which may be in a Currency other than the Functional Currency of the Holding Enterprise.

The designation of QBU is important as for a QBU, Functional Currency can be separately decided other than the Holding Entity's Functional Currency. Foreign Exchange Gain or Loss is calculated for transactions made in Non Functional Currency by QBU.

The Holding Entity calculates foreign exchange gain or loss on the Income or Loss earned by QBU separately.

CONCLUSION:

Hence identification of QBU is important for the purposes of Calculation of Foreign Exchange Gain or Loss for both QBU and Holding Entity.