Consolidating foreign subsidiary example

For clarity, paragraph 30.3 outlines some important factors when considering the functional currency of an entity, it says: ‘The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash.

Therefore, the following are the most important factors an entity considers in determining its functional currency: In addition, the currency in which funds from financing activities are generated will also have a bearing on an entity’s functional currency as well as the currency in which receipts from operating activities (the day-to-day, revenue-producing activities of the entity) are usually retained.

A change in functional currency can only take place if there is a change to the underlying transactions, events and conditions which are pertinent to the entity.

This could arise, for example, where there is a change of currency (for example if the UK decided to adopt the Euro).

An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.