Functional Currency Determination:
According to accounting standards (both IFRS and US GAAP), the functional currency is determined based on the primary economic environment in which the entity operates. Key factors include:
- Currency that mainly influences sales prices
- Currency of the country whose competitive forces and regulations mainly determine sales prices
- Currency that mainly influences labor, material, and other costs
- Currency in which funds from financing activities are generated
- Currency in which receipts from operating activities are usually retained
Analysis:
- The subsidiary is located in Mexico
- However, it generates most of its cash in the United States
- This indicates that the US dollar is the primary currency affecting its cash flows and operations
- The fact that most cash is generated in USD suggests that sales prices, customer payments, and operating receipts are predominantly in USD
Therefore, the functional currency is most likely the US dollar, as it represents the primary economic environment in which the subsidiary operates and generates cash flows.
