Q1. Identify and discuss the functional currency of the subsidiary whether BsF, $ or Euro and its appropriateness based on the guidelines given as per US GAAP as well as IAS21.
A1. According to US GAAP & IAS 21, an entity’s functional currency should be
a. the currency of the entity’s primary economic environment in which it operates. Currency in which it generally expenses
b. Currency that are relatively self contained & integrated
c. that affects sales prices of goods & services
d. of the country whose policies & regulations influences the sales prices
e. that affects the labor, cost of goods sold
f. the currency in which the entity generally raises its funds
From the case we observe that the subsidiary mainly transacts in local currency, BsF.
Considering all the above points and referring to the case, we can come to the conclusion that the subsidiary should use BsF as the functional Currency.
Q2. Discuss the official rate Vs. Parallel Rate and its significance with reference to reliance and reliability.
A2. In the case, we observe that there is huge difference between the official exchange rate quote (BsF 2.15 = US $1) & parallel rate quote (BsF 6 = US $1).
Official rate is the legal rate provided by the government. However, in this case, the hyperinflationary tendencies were not taken into account & thus the quoted rates were overvalued. Also it took 180 days waiting period for these quotes to be used. Thus, official rate was little unrealistic.
The parallel rate being the actual transaction rate, influenced by the market demand & supply, was already corrected for the inflation. However this rate was not fully accepted by the government, & was present as a semi legal rate.
As the government will have to take into consideration, the hyperinflation & macroeconomic conditions, at some point of time, the official rate too will be changed to