Determination of functional currency

Reference no: EM132894762

Case study 1

Case A
A Malaysian operation manufactures a product using Malaysian materials and labour. Spe- cialised equipment and senior operations staff are supplied by its Australian parent. Reim- bursement invoices for these services are denominated in the Malaysian ringgit. The product is sold in the Malaysian market at a price, denominated in Malaysian ringgit, which is de- termined by competition with similar locally produced products. The foreign operation re- tains sufficient cash to meet wages and day-to-day operating costs and further investment needs, with only a very small amount being paid as dividends to the Australian parent. The receipt of dividends from the foreign operation is not important to the parent's cash manage- ment function. Long-term financing is arranged and serviced by the Malaysian operation.

Case B
A Korean 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 non-related Australian manufacturers for assembly by Korean labour. The finished product is exported to a number of countries but South Korea is still the major market. Consequently, sales prices are mainly determined by competition within South Korea.

Required
In relation to these cases, discuss the choice of a functional currency.

In answering this question, reference must be made to:
- The definition of functional currency in paragraph 8 of AASB 121/IAS 21, particularly noting the need to identify the "primary economic environment".
- The factors in paragraphs 9-11 of AASB 121/IAS 21, with paragraph 9 containing the primary indicators.

Reference no: EM132894762

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