Aspire

(a) Factors to consider in determining functional currency of Aspire

IAS 21 The Effects of Changes in Foreign Exchange Rates defines functional currency as 'the
currency of the primary economic environment in which the entity operates'. Each entity,
whether an individual company, a parent of a group, or an operation within a group, should
determine its functional currency and measure its results and financial position In that currency.
If it is not obvious what the functional currency is, management will need to use its judgement in
determining the currency which most faithfully represents the economic effects of the underlying
transactions, events and conditions. An entity should generally consider the following factors:
(1) What is the currency that mainly Influences sales prices for goods and services (this will
often be the currency in which sales prices for its goods and services are denominated and
settled)?
(2) What is the currency of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services?
(3) What is the currency that mainly Influences labour, material and other costs of providing
goods or services? (This will often be the currency in which such costs are denominated and
settled.)
Other factors may also provide evidence of an entity's functional currency: (1) It is the currency
in which funds from financing activities are generated.
(2) It is the currency in which receipts from operating activities are usually retained.
Aspire's subsidiary does not make investment decisions; these are under Aspire's control, and
consideration of the currency which influences sales and costs is not relevant. Costs are incurred
in dollars, but these are low and therefore not material in determining which is the subsidiary's
functional currency. It is necessary, therefore to consider other factors in order to determine the
functional currency of the subsidiary and whether its functional currency is the same as that of
Aspire.
(1) The autonomy of a foreign operation from the reporting entity
(2) The level of transactions between the reporting entity and the foreign operation
(3) Whether the foreign operation generates sufficient cash flows to meet its cash needs
(4) Whether Its cash flows directly affect those of the reporting entity

The subsidiary has issued 2 million dinars of equity to Aspire. Although this Is In a different
currency from that of Aspire, Aspire has controlled how the proceeds were to be Invested - in
dinar-denominated bonds, suggesting that the subsidiary Is merely a vehicle for Aspire to Invest
In dinar-related Investments. Only 100,000 dinars of equity capital is from external sources, and
this amount is insignificant compared to the equity issued to Aspire. The lack of autonomy of the
subsidiary is confirmed by the fact that income from investments is either remitted to Aspire, or
reinvested on instructions from Aspire, and by the fact that the subsidiary does not have any
independent management or significant numbers of staff.
It appears that the subsidiary Is merely an extension of Aspire's activities rather than an
autonomous entity. Its purpose may have been to avoid reporting Aspire's exposure to the
dinar/dollar exchange rate in profit or loss - it would be reported in other comprehensive income
through the translation of the net investment in the subsidiary. These matters would lead to the
conclusion that the subsidiary's functional currency Is the dollar.
Operations are financed in dinars, and any income not remitted to Aspire is in dinars, and so the
dinar represents the currency in which the subsidiary's economic activities are primarily carried
out. However, in the absence of the benefit of presenting the dollar/dinar exchange rate
fluctuations in other comprehensive income, Aspire could have invested the funds directly, and
so Aspire's functional currency should determine that of the subsidiary.
(b) Goodwill on acquisition
Goodwill on acquisition of a foreign subsidiary or group, and any fair value adjustments, are
treated as assets and llabilities of the foreign entity. They are expressed in the foreign operation's
functional currency and translated at the closing rate. This means that an exchange difference
will arise between goodwill translated at the opening rate and at the closing rate. Even though the
goodwill arose through a consideration paid in dollars, it is treated as a foreign currency asset,
which means that it is translated into dinars at the rate ruling on the date of acquisition and then
re-translated at the year- end rate.
Any gain or loss on translation is taken to other comprehensive Income.
 Dinars (m) Rate $m
Consideration transferred 200
Non-controlling interests translated 250 5 50
at 1 May 20X3
Less fair value of net assets at acq'n translated (1,100) 5 (220)
at 1 May 20X3
Goodwill 30
Exchange loss to other comprehensive income - B (5)
Goodwill as re-translated at 30 April 20X4 150 6 25
: 30 x 5 + 6

The exchange loss of $5m is recognised in other comprehensive income with the corresponding
credit entries to a separate translation reserve (70%) and non-controlling interest (30%) in the
statement of financial position:
Debit Other comprehensive income $5m
Credit Translation reserve (SOFP): $5m x 70% $3.5m
Credit Non-controlling interest (SOFP): $5m x 30% $1.5m