Aspire, a public limited company, operates many of its activities overseas. The directors have asked for advice on the correct accounting treatment of several aspects of Aspires overseas operations. Aspire has a financial statement year end of 30 April 2020. Aspires functional currency is the dollar. The average currency exchange rate for the year is not materially different from the actual rate.

Exchange rates dinars: $1

1 May 2019 5.5

30 April 2020 6.5

Average exchange rate for year ended 30 April 2020 6.1

Aspire has created a new subsidiary, which is incorporated in the same country as Aspire. The subsidiary has issued 2 million dinars of equity capital to Aspire, which paid for these shares in dinars. The subsidiary has also raised 100,000 dinars of equity capital from external sources and has deposited the whole of the capital with a bank in an overseas country whose currency is the dinar. The capital is to be invested in dinar denominated bonds. The subsidiary has a small number of staff and its operating expenses, which are low, are incurred in dollars. The profits are under the control of Aspire. Any income from the investment is either passed on to Aspire in the form of a dividend or reinvested under instruction from Aspire. The subsidiary does not make any decisions as to where to place the investments.

Requirement:

Aspire would like advice on how to determine the functional currency of the subsidiary.