Case Study

A Japanese operation is a wholly-owned subsidiary of an Australian company. The parent regards the operation as a long-term investment and all financial and operational decisions are made by Japanese management. Long term financing is arranged and serviced by the Japanese subsidiary. The Japanese operation purchases raw materials from various non-related Australian businesses for their manufacturing processes in Japan. The finished product is exported to a number of countries with Australia as the major market. Sales prices are determined by competition within Australia.

Required:

In relation to this case, identify and explain in detail which currency is the functional currency of the foreign entity. Identify (but do not explain) which translation process would be required so that the Japanese operation can be included in the consolidated financial statements of the Australian parent.