Skip to content

ACCA Strategic Professional · Strategic Business Reporting (International) · Foreign transactions and entities

Zeta Co is incorporated in Country A, whose currency is the A$. It sells products mainly in A$ in the local market, but its raw materials are priced and paid for in US dollars. Selling prices are set by local competition and local regulation, and labour and overheads are paid in A$. Financing is raised in A$. Under IAS 21, what is Zeta Co's functional currency?

Zeta's functional currency is the A$. IAS 21 looks first to the currency that drives sales prices and the main operating costs, which here are local competition, regulation and labour. Dollar-priced raw materials are a secondary indicator only, and directors cannot simply choose the functional currency.

  1. AA$, because it is the currency of the primary economic environment, shown by sales prices, competition and local costsCorrect
  2. BUS dollars, because raw materials are priced and paid for in US dollars
  3. CThe presentation currency chosen by the directors
  4. DEither A$ or US dollars, at the directors' free choice

Explanation

IAS 21 defines functional currency as that of the primary economic environment in which the entity operates, mainly the currency influencing sales prices and the currency of the country whose competitive forces and regulations determine prices, plus labour and other costs. Here these indicators point to A$. The US dollar raw material cost is only one secondary indicator and does not override the primary ones. Management has no free choice.

Did you get it right without looking?

One question tells you little. A timed set on Foreign transactions and entities shows your real accuracy, how long you take and where you lose marks.

Practise Foreign transactions and entitiesFree diagnostic mock

More Foreign transactions and entities questions