Question 2 EAB20803 Financial Accounting and Reporting 3 Page 3 of 6 JANUARY 2020 CONFIDENTIAL The effects of changes in foreign exchange rates states that where an entity has foreign operations, such as overseas subsidiaries, branches, joint ventures or associates, it should determine the functional currency of that foreign operation. The functional currency is the currency of the primary economic environment in which the entity operates. Where a foreign operation has a functional currency that is different from that of the reporting entity, it will be necessary to translate the financial statements of the foreign operation into the currency in which the reporting entity presents its financial statements. However, where the foreign operation is located in a country with a high rate of inflation, the translation process may not be sufficient to present fairly the financial position of the foreign operation. Some adjustment for inflation should be undertaken to the local currency financial statements before translation. IAS 29 Financial reporting in hyper-inflationary economies deals with this issue. Required: a) Explain the factors which should be taken into account in determining whether or not the functional currency of a foreign operations is the same as that of its parent. (10 marks) b) Discuss the effects that hyper - inflation can have on the usefulness of financial statements and explain how entities with subsidiaries that are located in hyper- inflationary economies should reflect this fact in their consolidated financial statements. (10 marks) [20 marks)