1Tutorial 6 – Foreign Currency TransactionsQUESTIONS 3. In preparing financial statements, each entity is required to measure its financial performance, including impacts of any foreign currency items, in functional currency, while presenting its report in itspresentation currency(paras 17 and 18, AASB 121). (i)In determining functional currency of an entity (i.e. the currency of the primary economic environment in which the entity operates), a key identifying factor is the environment in which an entity primarily generates and expends cash (para. 9). Paragraphs 9, 10 and 11 set down indicators to assist in determining an entity’s functional currency, with paragraph 9 given priority in the event that the indicators are mixed. From paragraph 9, indicators of functional currency include the currency in which sales prices for its goods and services are denominated and settled, the currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services; and the currency in which such costs are denominated and settled. From paragraph 10, additional considerations are the currency in which financing is generated, and the currency in which receipts from operating activities are retained. For foreign operations that are a subsidiary, branch, associate or joint venture, factors to consider include whether the activities of the foreign operation are carried out with any degree of autonomy from the reporting entity, the proportion of transactions with the reporting entity, the impact of the foreign operation’s cash flows on the cash flows of the reporting entity, and the ability of the foreign operation to service debt independent of the reporting entity (para. 11). (ii) The presentation currency is ‘the currency in which the financial report is presented’ (para. 8). AASB 121permits the presentation currency of a reporting entity to be any currency (para. 38), and it may differ from the functional currency. The one restriction on selection of a presentation currency is that for the purposes of reporting under the Corporations Act 2001, only one presentation currency is permitted (para. Aus38.1).
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