The impact of financing in determining the functional currency

Question

Quizplus · Accepted Answer

The best choice is D as it takes into account both scenarios where the financing is primarily denominated in the foreign currency and handled by the foreign entity (resulting in the foreign currency as the functional currency) and where the financing is primarily from the parent and handled by them (resulting in the home currency as the functional currency). This aligns with the principles of the accounting standard IAS 21, which states that the functional currency is the currency of the primary economic environment in which the entity operates, taking into account the currency that affects cash flows, sales prices, and other factors. Financing can be a significant factor influencing these elements, and therefore it can impact the choice of functional currency.

The Impact of Financing in Determining the Functional Currency