(a)Describe the concepts of functional and
presentational currencies in the context of
accounting...

Question

(a)Describe the concepts of functional and
presentational currencies in the context of
accounting for overseas operations.

(b)Broome Ltd established an overseas
subsidiary on 1/7/2011 with FC XXXXXXXXXXcapital. Cash of FC XXXXXXXXXXwas the only
asset on 1/7/2011. In the year ended 30/6/2012, profit ofFC45
000 was made and the statement of financial position showed thefollowing:
Machinery
FC100 000
Inventory20 000
Receivables16 000
Cash9 000
Total assets145 000
Capital100 000
Retained earnings 45
000
145 000
On 1/7/2011, the exchange rate was A$1 = 2FC; on 30/6/2012
the rate was A$1 = 2.5FC; the average rate for 2011/2012 was A$1 = 2.25FC. The
functional currency is the foreign currency.
Translate the profit of FC45 000 and the statement of
financial position into Australian dollars. Explain the nature of the balancing
item foreign exchange gain.

(8 + 10 = 18 Marks)

David · Accepted Answer

A) Functional Currency 
The Companies that do business overseas will have some subsidiaries and the operations 
conducting in currency other than US Dollar is termed as functional currency.  It represents the 
currency in which major inflows or outflows of operations are taking place. 
Functional currency directly impacts the financial statements of the corporation. It ensures that 
business overseas operations are measured locally by using the common currency prevalent in 
that country. 
Following factors are considered to determine the foreign currency 
1. Currency in which goods and services are sold   
2.

(a)Describe the concepts of functional and presentational currencies in the context of accounting for overseas operations. (b)Broome Ltd established an overseas subsidiary on 1/7/2011 with FC...

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