Consolidation theory a) IAS 21 The Effects of Changes in Foreign Exchange Rates contains guidance on determining the functional currency for a foreign subsidiary Required: Discuss the factors that should be taken into account when determining the functional currency. (7 marks) (b) Daffodil plc is a UK listed company with the UK pound as its functional currency. Consolidated financial statements are prepared using the UK pound. Daffodil has 70% subsidiary, Orchid Limited. Orchid limited in located in Jamaica where the currency is the Jamaican dollar. All goods are produced by Daffodil in its UK factory and shipped to Orchid. Orchid sells these products in Jamaica. Orchid has to comply with local laws and regulations. Orchid employs its staff directly and pays wages, selling and distribution expenses and other expenses in Jamaican dollars. Any cash surplus generated by Orchid is retained by the company. Orchid has a long term loan finance from a Jamaican bank. Required: Evaluate how each of the above factors would contribute to determining the functional currency of Orchid and reach an appropriate conclusion as to what the functional currency of Orchid should be. (8 marks)