On 1 Jan 2021, assume an Australian company Uluru Limited set up a subsidiary Kiwi Limited in New Zealand. Kiwi Limited manufactures a product using materials and labor in New Zealand. Uluru Limited supplies specialized equipment and senior operations staff and reimbursement invoices for these services are denominated in the New Zealand dollar. The product is sold in the New Zealand market at a price, denominated in New Zealand dollar, which is determined by competition with similar locally produced products. Kiwi Limited retains sufficient cash to meet wages and day-to-day operating costs with the remainder being remitted to Uluru Limited. The receipt of dividends from Kiwi Limited is important to the parent’s cash management function. Long-term financing is arranged and serviced by Uluru Limited.

Required:

a) Determine the functional currency of Kiwi Limited, with reference to all the indicative factors contained within AASB 121 and justify your determination. The currency used in New Zealand and Australia are the New Zealand dollar (NZD) and Australian Dollar (AUD), respectively.

b) Discuss why it is important to determine the functional currency.