Which currency is the functional currency of foreign entity

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Reference no: EM132894767

Case study - Determination of functional currency

Case A
An Indonesian operation manufactures a product using Indonesian materials and labour. Pat- ented processes and senior operations staff are supplied by its Australian parent. Reimburse- ment invoices for these services are denominated in Australian dollars. The product is sold in the Australian market at a price, denominated in Australian dollars, that is determined by competition with similar locally produced products. The Indonesian operation remits all rev- enue to the Australian parent, retaining only sufficient cash to meet wages and day-to-day op- erating costs. The receipt of cash from the Indonesian operation is important to the parent's cash management function. Long-term financing is arranged and serviced by the parent.

Case B
A New Zealand operation is a wholly-owned subsidiary of an Australian company. The parent regards the operation as a strategic investment and all financial and operational decisions are made by Australian management. The New Zealand operation purchases parts from various non-related Australian manufacturers for assembly in New Zealand. The finished product is exported to a number of countries with Australia as the major market. Consequently, sales prices are determined by competition within Australia.

Required
In relation to these cases, discuss which currency is the functional currency of the foreign entity.

Reference no: EM132894767

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