Bounty Ltd is an Australian company with two overseas subsidiaries, one in Indonesia and the other in South Korea. The Indonesian subsidiary has as its major activity the distribution in Indonesia of Bounty Ltd's products. It has been agreed that the subsidiary will, for a period of time, retain all profits in order to expand its distribution network in Indonesia. In the past it has remitted most of its profits to the Australian parent company.

The South Korean subsidiary has been established to manufacture a range of products for the South-East Asian market. There is also an expectation that it could in the future become the major manufacturing plant for Bounty Ltd and provide a supply of products for the Australian market.

Based on the above, determine the functional currency of the foreign subsidiaries. Discuss your choice with the class.

1. Which currency mainly influences sales prices for goods and services?

(local currency based on local conditions OR reporting entity currency based on worldwide competition)

e.g. in what currency are sales contracts written and paid in?

2. What is the currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services? (active local market OR is it sold to reporting entity market)

3. What is the currency that mainly influences labour, material and other costs of providing goods and services? (local conditions OR reporting entity sources)

e.g. what currency are payments for labour and raw materials paid in?

4. In which currency are the funds from financing activities, such as issue of debt and equity instruments, generated? (local currency OR reporting entity currency)

5. In which currency are the funds from operations normally retained? (in foreign entity OR in reporting entity)