According to AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates, the key economic factor to consider in determining an entity's functional currency is:
A) which economic environment has the higher exchange rate.
B) in which economic environment does the company incur the highest proportion of its production costs.
C) which economic environment an entity primarily generates and spends cash.
D) none of the above.

Question

Quizplus · Accepted Answer

The key economic factor to consider in determining an entity's functional currency is the economic environment in which the entity primarily generates and spends cash. This means that the functional currency should be the currency of the primary economic environment in which the entity operates and generates its cash flows. Option A is not relevant to the determination of the functional currency, and option B may be a factor to consider but is not the most important one. Option D is not correct as there is a specific economic factor to consider in determining the functional currency.

According to AASB 121/IAS 21 the Effects of Changes in Foreign