Question 3

Setia Berhad, a public limited company, has functional currency in dollar. In Year 2020,

Setia has created a new subsidiary, which is incorporated in the same country as Setia. The subsidiary has issued 2 million dinars of equity capital to Setia, which paid for these shares in dinars. The subsidiary has also raised 100,000 dinars of equity capital from external sources and has deposited the whole of the capital with a bank in an overseas country whose currency is the dinar. The capital is to be invested in dinar denominated bonds. The subsidiary has a small number of staff and its operating expenses, which are low, are incurred in dollars. The profits are under the control of Setia. Any income from the investment is either passed on to Setia in the form of a dividend or reinvested under instruction from Setia. The subsidiary does not make any decisions as to where to place the investments.

Required:- Advise the directors of Setia Berhad on how to determine the functional currency of the subsidiary.