When It Is Not Clear What the Functional Currency Is

question 7

Multiple Choice

When it is not clear what the functional currency is, an accountant must use professional judgment to choose the functional currency. What is the main criterion upon which the choice should be based?

• A)Whether it faithfully represents the accounting effects of the transactions and events
• B)Whether it faithfully represents the economic effects of the transactions and events
• C)Whether it faithfully represents the translation effects of the transactions and events
• D)Degree to which it minimizes accounting exposure

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Definitions:

Foreign Exchange Reserves

Assets held by central banks in foreign currencies, used to back liabilities on their own currency as well as to influence monetary policy.

Fixed Exchange Rate

A system where the government or central bank sets the official exchange rate in relation to the currency of another nation or the value of gold.

Flexible Exchange Rate

A rate of exchange that is determined by the international demand for and supply of a nation’s money and that is consequently free to rise or fall because it is not subject to currency interventions. Also referred to as a “floating exchange rate.”

Fixed Exchange Rate

A currency system where the value of a currency is pegged against another currency, a basket of currencies, or another measure of value.