Question

Functional Currency

A Singaporean operation is a wholly owned subsidiary of an Australian company which regards the operation as a long term investment, and thus takes no part in the day to day decision making of the operation. The operation purchases parts from various Australian manufacturers for assembly by Singaporean labour. The finished product is exported to a number of countries but Singapore is still the major market. Consequently, sales price is dominated by competition within Singapore and follows the local regulations in Singapore.

Required

Using AASB121 highlight and explain the factors that will determine the functional currency? Is it Singaporean or Australian dollars?

NOTE: This references to Financial Accounting

Answer 1

Functional currency is the currency of the primary economic environment in which the subsidiary operates. Determining which currency is the functional currency would depend on factors such as where the subsidiary's sales market is, how it's sales prices are determined, where its expenses are incurred, its source of financing, and the extend of intercompany transactions. In this case, the primary currency used by the business is Singaporean dollars. Singapore is the major market for business and Singaporean dollar is the currency that mainly influences sales price for goods and services. So we can conclude that Singaporean dollar is the functional currency.