OVS operates in country G, which has the Grum as its currency. OVS sources all raw materials locally and is subject to local taxes and corporate regulations. The current workforce is recruited locally, although the majority of its sales are to customers from neighbouring countries. OVS has operated autonomously since being acquired by JK and during the year raised a significant amount of finance from the main bank in G to fund its own investment requirements.

Required:

In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates:

(i) Explain the key factors which determine an entity’s functional currency and using these factors identify the functional currency of OVS

(ii) Explain how the financial statements of OVS will be translated into dollars prior to preparing the consolidated accounts of JK Group. JK holds 100 per cent of the ordinary shares of OVS.