Question

Koala Ltd is a company registered in Australia. It controls a subsidiary company residing in India. The subsidiary operates within India and sells its goods and purchases its raw materials in India. It is estimated that 80% of Koala’s sales are generated by its subsidiary based in India. The remaining balance of sales is generated by their operations based in Australia. Seventy percent of the shareholders of Koala Ltd are based in Australia.

Required

1. Determine the functional currency of Koala Ltd. Justify your decision.
2. Determine the presentation currency of Koala Ltd. Justify your decision.

Answer 1

Functional currency of Koala Ltd is Indian Rupee

Functional currency refers to the main currency used by a business or unit of a business. It is the monetary unit of account of the principal economic environment in which an economic entity operates.The functional currency is determined by looking at a number of relevant factors. This currency should be the currency in which an entity usually generates and spends cash. Functional currency should be the one in which the business transactions of an entity are normally denominated. Here  80% of Koala’s sales are generated by its subsidiary based in India. Majority of cash transactin is in indian Rupee .That means it is functioning in Indian Rupee. Its Aus Doller transaction is only 20%. which does not make Dollar as its functional currency.

presentation currency of Koala Ltd is Australian Dollar.

An entity can present its financial statements in any currency. Usually they are presented in the functional currency; therefore usually the functional currency and the presentation currency is the same. If the presentation currency differs from the functionally currency, the financial statements should be translated into the presentation currency.

Here the prsentation currency is Australian Dollar because Seventy percent of the shareholders of Koala Ltd are based in Australia. The all need the financial statement in Australian Dollar.There for the financial statements should be translated into the Aus Dollar.