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ACCA Applied Skills · Financial Reporting · Foreign currency transactions

Kestrel, a company based in a country whose currency is the dinar, manufactures goods that it sells mainly in dollars. Its selling prices are set in dollars, competition is global and priced in dollars, and its major costs (materials and labour) are incurred in dinars. Under IAS 21, which factor is the primary indicator of Kestrel's functional currency?

The currency that mainly influences sales prices is the primary indicator of functional currency under IAS 21. Here that is the dollar, because prices and competition are dollar-based. Location, presentation currency and financing currency are not the primary determinants of the functional currency.

  1. AThe currency of the country in which Kestrel is located
  2. BThe currency that mainly influences sales prices for its goodsCorrect
  3. CThe currency in which Kestrel's financial statements are presented to shareholders
  4. DThe currency in which finance is raised from lenders

Explanation

IAS 21 treats the currency that mainly influences sales prices, and the currency of the competitive forces and regulations that determine those prices, as a primary indicator of functional currency. Location of the entity is not decisive, and the presentation currency is a free choice. Financing currency is only a secondary indicator.

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