Can INR be presumed as the Functional Currency for SIMCO?

(a) No, SIMCO cannot presume INR to be its functional currency on the basis of its location. It needs to consider various factors listed in Ind AS 21 for determination of functional currency. Primary indicators: 1. The currency that mainly influences: (a) sales prices for its goods and services. This will often be the currency in which sales prices are denominated and settled; and of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. (b) labour, material and other costs of providing goods and services. This will often be the currency in which these costs are denominated and settled. 2. Other factors that may provide supporting evidence to determine an entity's functional currency are ( Secondary indicators ): (a) the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are generated; and (b) the currency in which receipts from operating activities are usually retained. 3. If an entity is a foreign operation , additional factors set out in Ind AS 21 should be considered to determine whether its functional currency is the same as that of the reporting entity of which it is a subsidiary, branch, associate or joint venture: a. Whether the activities of foreign operations are carried out as an extension of that reporting entity, rather than being carried out with a significant degree of autonomy; b. Whether the transactions with the reporting entity are a high or a low proportion of the foreign operation's activities; c. Whether cash flows from the activities of the foreign operations directly affect the cash flows of the reporting entity and are readily available for remittance to it. d. Whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligation without funds being made available by the reporting entity. On the basis of additional factors mentioned in point 3 above, SIMCO cannot be said to have functional currency same as that of Simran Constructions GmbH. Hence, primary and secondary indicators should be used for the determination of its functional currency giving priority to primary indicators. The analysis is given below: Its significant revenues and competitive forces are in USD.Its significant portion of cost is incurred in INR. Only 20% costs are in USD.78% of its finances have been raised in USD.It retains its operating cash flows partially in USD and partially in INR. Keeping these factors in view, USD should be considered as the functional currency of Sim Contractors Pvt. Ltd.