A functional currency infers to the primary currency utilized in performing a day-to-day operation in a business. Considering the case above, the primary reason for Company XS using Euro as a denominating currency is because, all of the labour costs and the sales and purchases were executed in Euro. However, following the fourth quarter, the sales department of XS were closed down, following the purchases of materials used from Company X instead of outside suppliers. Therefore, the functional currency of XS could have changed to US Dollar. Furthermore, according to AASB 121, in the case that the currency of the foreign operation is not the same as foreign currency of the parent, it is mandatory for the functional currency to be translated into the parent companys functional currency, that is Company Xs US Dollar