(a)    IAS 21 The Effects of Changes on Foreign Exchange Rates states that the functional currency is the currency of the primary economic environment in which the entity operates, which is normally the one in which it primarily generates and expends cash. An entity’s management should consider the following factors (primary indicators) in determining its functional currency:
– the currency which mainly influences sales prices for goods and services;
– the currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services; and
– the currency which mainly influences labour, material and other costs of providing goods and services.
Further factors (secondary indicators), which may also provide evidence of an entity’s functional currency, are the currency in which funds from financing activities are generated and in which receipts from operating activities are retained. Other factors include the autonomy of a foreign operation from the reporting entity, the level of transactions between the entities, whether the foreign operation generates sufficient cash flows to meet its debt obligations, and whether its cash flows directly affect those of the reporting entity.
Suntory
It appears that the dollar is the functional currency of Suntory. Suntory’s sales prices are determined by legal requirements and the business environment in its own jurisdiction and the dollar is the currency in which the sales prices are denominated and settled. The operations are sourced locally in dollars. There is a small amount of trading in other currencies and Minor pays a dividend on a monthly basis in euros but the main currency of its operations is the dollar, which indicates that the dollar is the functional currency of the parent. Suntory need not consider the secondary factors.
Maior
The factors in the scenario seem to indicate the yen as being the functional currency of Maior. The sales prices for the subsidiary’s golf equipment are determined by local legal and business conditions in yen. The yen is the currency in which those sales prices are denominated and settled. Some transactions are undertaken with China but these are relatively small. Although Maior sometimes imports and sells its parent’s products, this is only a small part of its business activity. The yen is also used to pay the major operating costs. Thus without evidence to the contrary, the yen is the functional currency of Maior and Maior need not consider the secondary factors.
Minor
Minor imports golf clothing manufactured by Suntory and pays the parent in dollars. Suntory discounts the price paid by Minor for its products, which are sold in euros.
The prices are influenced both by the local legal and business conditions and the cost of the product purchased from Suntory. Also all price changes have to be approved by Suntory. Thus the exchange rate between the dollar and the euro will affect the pricing of the product. All other operating expenses are incurred locally and paid in euros. A dividend amounting to the net profit for the month is paid in euros to Suntory. The determination of the functional currency is not clear-cut.
The euro is the currency in which Minor’s sales prices are set, denominated and settled. However, movements in the exchange rate between the euro and the dollar influence those selling prices. Minor’s sales prices are also affected by the local legal and business conditions in Portugal. The costs of the products from Suntory are influenced by the dollar but all other costs of providing goods are in euros. As a result, the secondary factors should be considered.
Funds from financing activities are generated primarily in dollars and Minor keeps minimal cash reserves because any net profit is transferred to the parent in cash at the end of the month. Consequently, there is some support for the dollar as being the functional currency as Minor is not autonomous, transactions with the parent are a high proportion of the subsidiary’s activities as Suntory is the subsidiary’s only supplier and cash flows from the activities of Minor directly affect the cash flows of Suntory and are readily available for remittance to it. Thus it appears that the dollar is the functional currency of Minor.
(b)    IAS 38 Intangible Assets states that the cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life, that the amortisation method should reflect the pattern of benefits and that it should be reviewed at least annually.
The amortisation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the amortisation method should be changed prospectively as a change in estimate under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Expected future reductions in sales could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. Hence, the trademark would be amortised over a 2·5-year period until May 2018
IAS 36 states that an entity should assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity should estimate the recoverable amount of the asset. Irrespective of whether there is any indication of impairment, an entity shall also test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Thus, Suntory should test the trademark for impairment.