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

Answer 1

Following the guidlines of AASB121 , we can say that the functional currency of the Singapore Subsidiary needs to be Singaporean Dollar. The reasons are follwing;

1. The sales price is mainly determined by the competitive forces in Singapore

2. The main market is Singapore , so Singaporean dollar is the main currency driving the sales price and revenue

3. The Singaporean subsidiary substantial activity like assembly , sales and marketing and therefore incurs substantial cost in local currency. It does not simply import the finished goods , sales it and remits the proceeds to parent. Therefore the Sigaporean entity is not an extention of Australian entiry , its a fully operational local subsidiary.

4. The main market is Singapore , so majority of the revenue is earned in Sigaporean dollar

When we consider the above factors as per the guidelines of AASB121 , we can conclude that Singaporean dollar will be the fucntional currency of Singaporean Subsidiary.