Regents Corporation is a recently acquired U.S. manufacturing subsidiary located on the outskirts of London. Its products are marketed principally in the United Kingdom with sales invoiced in pounds and prices determined by local competitive conditions. Expenses (labor, materials, and other production costs) are mostly local, although a significant quantity of components is now imported from the U.S. parent. Financing is primarily in

U.S. dollars provided by the parent. Headquarters management must decide on the functional currency for its London operation: Should it be the U.S. dollar or the British pound? You are asked to advise management on the appropriate currency designation and its relative financial statement effects. Prepare a report that supports your recommendations and identify any policy issues your analysis uncovers. Exhibit 6-14 presents comparative balance sheets for Regents Corporation at December 31, 2010 and 2011, and a statement of income for the year ended December 31, 2011. The statements conform with U.S. generally accepted accounting principles prior to translation to dollars.

1. Exchange rates:

December 31, 2010 ........$1.80 = ￡1

December 31, 2011 ........$1.90 = ￡1

Average during 2011 ........ $1.86 = ￡1

Average during fourth quarter 2010 ...$1.78 = ￡1

Average during fourth quarter 2011 ..$1.88 = ￡1

2. Common stock was acquired, long-term debt issued, and original fixed assets purchased when the exchange rate was $1.70 = ￡1.

3. Due to parent account is denominated in U.S. dollars.

4. Exchange rate prevailing when the intangible asset (patent) was acquired and additional fixed assets purchased was $1.82 = ￡1.

5. Purchases and dividends occurred evenly during 2011.

6. Of the ￡300 depreciation expense for 2011, ￡20 relates to fixed assets purchased during 2011.

7. Deferred taxes are translated at the current rate.

8. Inventory represents approximately three months of production.