Where profits generated by the foreign operation are retained in the foreign entity and used for its expansion:
A) the foreign operation's currency is likely to be the presentation currency.
B) the foreign operation's currency is likely to be the functional currency.
C) the reporting entity's currency is likely to be the functional currency.
D) the reporting entity's currency is likely to be the presentation currency.

Question

Quizplus · Accepted Answer

When profits generated by the foreign operation are retained in the foreign entity and used for its expansion, the foreign operation's currency is likely to be the functional currency. This is because the foreign entity is operating independently and is not remitting profits back to the reporting entity. As a result, the foreign operation's financial statements will be prepared in its functional currency, which is also the currency of the primary economic environment in which it operates.

Where Profits Generated by the Foreign Operation Are Retained in the Foreign