IAS 21 The Effects of Changes of Foreign Exchange Rates, paras. 9-14, detail factors to be considered when determining an entity's functional currency. By way of process, all indicators are first considered. When the basket of indicators is mixed and the functional currency is not obvious, however, management must use professional judgment to determine the currency that most faithfully represents the economic effects on the entity of the underlying transactions. When the judgment approach is employed, the primary indicators are evaluated first, and the secondary and additional indicators, which were designed to provide additional supporting evidence, are only considered when the primary indicators do not point conclusively to a functional currency. Primary factors to be considered (paragraph 9): 1. The currency that mainly influences the sales price for goods and services and the currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. 2. The currency that mainly influences costs, including labour and material. Advanced Financial Reporting Week 5 Student Notes 33 / 61 Note that in many instances the currency that influences revenues and expenses is the same currency in which the sales prices and costs are denominated. Secondary factors to be considered (paragraph 10): 1. The currency in which capital (debt and equity) is raised. 2. The currency in which receipts from operating activities are usually retained. Additional factors to be considered (paragraph 11): Additional factors for determining functional currency of FSUB Same functional currency as parent (integrated operation) Functional currency is FSUB's local currency (self-sustaining foreign operation) The activities of the foreign operation are carried out as an extension of the parent (that is, it only sells goods imported from the parent and remits the proceeds to the parent). FSUB acts autonomously (that is, it generates income and expenses and arranges loans primarily it its local currency). Transactions with the parent are a relatively high proportion of FSUB's operations. Transactions with the parent are a relatively low proportion of FSUB's operations. FSUB's cash flows directly affect the parent's cash flows and are readily available for repatriation by the parent. FSUB's cash flows do not directly affect the parent's cash flows and are not readily available for repatriation by the parent. FSUB's cash flow is insufficient to service its debt load without parental subsidy. FSUB's cash flow is sufficient to service its debt load without parental subsidy. While the terminology is no longer used in the governing standard, a FSUB whose functional currency is the same as the parent's is often referred to as an integrated operation, whereas a FSUB whose functional currency differs from the parents is commonly referred to as a self-sustaining foreign operation. ASPE continues to use the terms self-sustaining foreign operation and integrated operation