Question

A Singaporean 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 Australian manufacturers for assembly by Singaporean labour. The finished product is exported to a number of countries but Singapore is still the major market. Consequently, sales price is dominated by competition within Singapore and follows the local regulations in Singapore.

Using AASB121 highlight and explain the factors that will determine the functional currency? Is it Singaporean or Australian dollars?

Answer 1

As per AASB 121, Australian companies can now determine a different currency as the functional currency as long as certain conditions are met. The following factors will determine the functional currency:

1. Currency itself which influences the sales price of the goods (the standard price is fixed in which currency) the currency of the country whose competitive markets, taxes, rules and regulations determine the selling price of goods and services. - This would be Singaporean currency in the case since it operates in Singapore w.r.t. fixation of Selling price and since major of the markets lie in Singapore itself.

2. The currecy which influences the cost of labour, material costs and other direct and indirect costs of providing goods and services - The labour engaged here are from Singapore whereas the materials are imported from Australia. However it is believed that other costs and services associated with assembly would be incurred in Singapore currency - Hence here again we can say Singapore currecy determines major of the costs labour and other administrative costs.

3. The other factors would not imply here much since the entity is primarily a long term investment and does not take part in day to day decision making.

Hence the functional currency here should be Singapore Dollars.