Question

Oz Hats Ltd manufactures hats including farm-style Australian hats that it sells in Australia and overseas markets. Oz Hats Ltd has established a wholly owned subsidiary in the US to distribute its product in this market. The US subsidiary is financed by the parent entity.

The US subsidiary purchases hats from the Australian parent, but then modifies the design in the US making it suitable to market there. All design and marketing decisions are made by the US subsidiary. The finished product is sold in the US with sales prices determined by competition within the US. All profits are retained in the US for expansion purposes.

Based on the above information, discuss which currency is the functional currency of the US subsidiary.

Answer 1

Based on the above information, the functional currency of US subsidiary will be US dollar i. e local currency. Reasons for that are

1. Profit earned by the subsidiary will be retained in the US for expansion purpose which ultimately results into various kinds of payments like for land, labour, capital etc... These functions will become easier by adopting local currency.

2.Every transaction translation will result in net gain/loss in the books of accounts, which are nothing bit artifical losses and gains

3. Lastly by choosing US Dollar as functional currency, we can sort out the complexities of forex market and we can translate the overall efficacy of our business at the year end or month end through forex rates to incorporate the same in Holding companies Financial statements.