Question

to make consolidated financial statements, the financial statements of a foreign subsidiary must be translated so as to use the same currency as the parent company. To determine which method to use in the translation process, the accountant must determine the functional currency of the subsidiary. IN U.S. GAAP, there are two primary factors that should be considered. What are they?

Answer 1

The following economic factors, and possibly others, should be considered both individually and collectively when determining the functional currency-

-Cash flow currency
-Location of the factors that affect sales prices
-Location of the sales market
-Expenses – where goods and services are acquired
-The primary currency in which financing is denominated
-Volume of intercompany transactions and arrangements
-IFRS

The two primary factors to be considered in determining the functional currency are:

• The currency that influences its sales prices, which will often be the currency in which the sales prices for its goods and services are denominated and settled and the currency of the country whose competitive forces or regulations determine these sales prices.
  
• The currency that mainly influences labor, material and other costs of providing goods and services.