Discussion Questions

Case 1: Doe Ltd an American company is a wholly-owned subsidiary of Jane Ltd - an Australian company which regards the operation as a long-term investment, and thus takes no part in the day-to-day decision making of the operation. The operation purchases parts from various nonrelated Australian manufacturers for assembly by American labour. The finished product is exported to a number of countries but US is still the major market. Consequently, sales prices are mainly determined by competition within the US.

Case 2: A Malaysian operation manufactures a product using Malaysian materials and labour. Specialised equipment and senior operations staff are supplied by its Australian parent. Reimbursement invoices for these services are denominated in the Malaysian ringgit. The product is sold in the Malaysian market at a price, denominated in Malaysian ringgit, which is determined by competition with similar locally produced products. The foreign operation retains sufficient cash to meet wages and day-to-day operating costs and further investment needs, with only a very small amount being paid as dividends to the Australian parent. The receipt of dividends from the foreign operation is not important to the parents cash management function. Long-term financing is arranged and serviced by the Malaysian operation.

Determine the functional currency in each case with reference to AASB 121/IAS 21.