Jolly Lolly Ltd -- Topsy Turvy GmbM Can Cao (41620801) Wan Wang (41838580) Lv Qing ( )
OutlineAccounting Standards—Determining the functional currencyCase AnalysisAccounting Treatments & Disclosures—Change in functional currencyConclusion
Determining the Functional CurrencyThe AASB 121 Para 8 defined functional currency of a foreign entity as follows: An entity’s functional currency is the currency of the primary economic environment in which the entity operates.According to FASB Guidelines, Economic factors should be considered when determining the functional currency are: Cash flow indicators. Sales price indicators. Sales market indicators. Expense indicators. Financing indicators. Intercompany transactions indicators.
Determining the FunctionalCurrency (AASB 121) Para 12---on determining the functional currency, management should use judgment and gives priority to the indicators in Para 9 before considering the indicators in Para 10 and Para 11. Para 9--- normally the one in which it primarily generates and expands cashconsider the currency: in which sales prices are denominated or which influences sales prices of the country whose competitive forces and regulations influence sales prices In which input costs- labor, materials-are denominated and settled, or which influences such costs Pare 10---consider two factors: the currency in which funds from financing activities are generated the currency in which receipts from operating activities are retained
Determining the FunctionalCurrency (AASB 121)Para 11--- consider other factors: Whether the activities of the foreign operation are carried out as an extension of the reporting entity Whether transactions with the reporting entity are a high or low proportion of the foreign operation’s activities Whether cash flow from the activities of the foreign operation directly affected the cash flow of the reporting entity and are readily available for remittance to it Whether cash flows from the foreign operation are sufficient to service existing and expected debt obligations without funds being made available by the reporting entity Para 13---Once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions.
Case Analysis Topsy Tursy GmbH is an entity located in Germany. This entity sells and distributes the Jolly Lolly group’s patented climbing equipment in Europe.Jolly Lolly Limited 70% control Topsy Turvy GmbH Parent Subsidiary As Jolly Lolly has acquired 70% interest in Topsy Tursy GmbH (TTG), TTG is considered to be a foreign subsidiary of Jolly Lolly group. In determining the functional currency of a foreign subsidiary. Generally, if 1) the subsidiary is acting as an intermediary for the parent’s activities. functional currency = parent currency 2) the subsidiary is acting as a free standing unit. functional currency = local currency
Case Analysis In past years, all products are sourced from Jolly Lolly, and sales prices are determined based on a margin over the acquisition cost. For this situation, the products being sold are made in Australia, and the selling price is determined by its acquisition cost. Therefore, Australian currency denominates the production costs and sale prices. During the current year however, a major competitor has entered the European market and the pricing of the good is becoming increasingly subject to European competitive forces. In current year, the sales prices are not responsive in short term to exchange rate changes and they are determined mainly by local conditions. Therefore, the sales price depend on the local currency.
Case Analysis All European sales are handled by Topsy Turvy and pricing is standard throughout the European distribution network, except distribution costs. Operating expenses are determined primarily by local conditions. There is not an extensive interrelationship between the operations of the foreign subsidiary and those of the parent. All profits generated by Topsy Turvy branch are retained to fund the group’s European operations. Low volume of intergroup transactions and the receipts are retained in local currency to fund European operations.
Case AnalysisEconomic Indicators Past CurrentSales Prices A$ EUROSales Market EURO EUROProduction Costs A$ A$Operating Expenses EURO EUROIntragroup Transactions LOW LOW
Case Analysis1) For past years, the functional currency is Australian currency. TTG is considered to be an intermediary for the parent. According to AASB121, Para 9-12, the functional currency is normally the one in which it primarily generates and expends cash. As the products were sourced from Australia and selling prices were determined by margin over acquisition costs, the input costs and the sales prices are primarily determined by Australian currency. 2) For the current year, the functional currency is local currency –Euro. TTG is considered to be a free standing unit. As there is a change in sales market conditions, the sales prices are determined primarily by local competition. This caused the currency of the major economic environment changes from Australian to European currency.(AASB121, Para 9- 13)
Accounting Treatment (AASB 121)Para 35: When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.Para 36 As noted in paragraph 13, once the functional currency is determined, it can be changed only if there is a change to those underlying transactions, events and conditions. For example, a change in the currency that mainly influences the sales prices of goods and services may lead to a change in an entity’s functional currency.
Accounting Treatment (AASB 121)Para 37: The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non- monetary items are treated as their historical cost. Exchange differences arising from the translation of a foreign operation previously recognized in other comprehensive income in accordance with paragraphs 32 and 39(c) are not reclassified from equity to profit or loss until the disposal of the operation.
Accounting Treatment (AASB 121) Past Current (local–function) (function - presentation)Non-monetary items Para 23(b) of AASB 121 Para 39(a) of AASB 121 Using the historical Using the closing exchange exchange rate rateExchange gain/loss Para 28 of AASB 121 Para 39(c)of AASB121 In P&L classified as other As a separate component of comprehensive of income equity, Foreign Currency Translation Reserve(FCTR)
Disclosure (AASB 121) Para 53 When the presentation currency is different from the functional currency, that fact shall be stated, together with disclosure of the functional currency and the reason for using a different presentation currency. Para 54 When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency shall be disclosed.
Conclusion During the year ended 30 June 2011: GGT has changed its functional currency from Australian dollar to Euro, because of the change in sales market makes the sale prices are determined mainly by local condition.