Question 4

a. White Inc is a wholly 100% subsidiary to Malaysian company, Black Bhd. White Inc is located in a foreign country and involved in gold mining. The
income of White Inc is denominated and settled in dinars.

The output of the mine is routinely traded in dinars and its price is determined initially by local supply and demand. White pays 30% of its costs and expenses in dollars with the remainder being incurred locally and settled in dinars.

White’s management has a considerable degree of authority and autonomy in carrying out the operations of White and is not dependent upon group companies for finance.

Required:

Discuss and apply the principles set out in MFRS 121 The Effects of Changes
in Foreign Exchange Rates in order to determine the functional currency of White Inc. (7 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.