Functional and Presentation Currency

International Accounting Standard 21 (IAS 21) defines functional currency as “the currency of the primary economic environment in which the entity operates”. Functional currency is the currency that mainly influences the company's transactions and cash flows, it is the currency of the country where the entity primarily generates and expends cash. It is the currency that is most appropriate for measuring the entity's financial performance and position.

The same Standard defines presentation currency as “the currency in which the financial statements are presented”. It can be different from the functional currency. It is the currency in which the financial statements are intended to be used by the primary users. The presentation currency is chosen by the management and is typically the currency that is most relevant to the primary users of the financial statements.

IAS 21 states that an entity shall present its financial statements, including the income statement and the statement of financial position, in the presentation currency chosen by the management, and that an entity shall translate its financial statements into the presentation currency in a manner consistent with the requirements of IAS 21.

The functional currency is determined by considering a number of relevant factors. This currency should be the currency in which an entity normally generates and expends cash. The functional currency should be the currency in which an entity's transactions are normally denominated. All transactions that are not denominated in the functional currency are treated as foreign transactions. The following five factors should be considered in determining the functional currency. The currency is the functional currency:

• That mainly affects the prices at which the goods or services are sold.
• Of the country whose regulations, market conditions and competitive forces mainly affect the pricing policy of the entity.
• That influences the costs and expenses of the entity.
• In which the funds are usually generated.
• In which receipts from operating activities are retained.

The first three factors are considered to be the most significant factors in determining the functional currency.

An entity's functional currency reflects the transactions, events and conditions under which the entity operates and conducts its business. Once the functional currency has been determined, it does not change. A functional currency should be changed only when there is a change in the nature of the underlying transactions, events and conditions.

If there is a change in the functional currency, it should be applied from the date of the change. The change should be accounted for prospectively rather than retrospectively. The change in functional currency should be linked to a change in the underlying conditions and transactions. For example, a change in the primary market may result in a change in the currency that affects selling prices.

An entity may present its financial statements in any currency. Usually, they are presented in the functional currency; therefore, the functional currency is usually the same as the presentation currency. When the presentation currency is different from the functional currency, the financial statements should be translated into the presentation currency.

Choice of Presentation Currency for Transnational Companies

For international corporations with branches in multiple countries, the choice of presentation currency can be a complex decision. According to International Accounting Standard 21 (IAS 21), the presentation currency should be the currency that is most appropriate for the primary users of the financial statements.

In the case of an international corporation with branches in multiple countries, the management will typically choose the currency that is most relevant to the primary users of the financial statements. This could be the currency of the country where the company is headquartered, the currency of the country where the majority of the company's revenue is generated, or the currency of the country where the company is listed on a stock exchange.

It is important to note that the choice of presentation currency can have a significant impact on the financial statements, as it affects the translation of the functional currency into the presentation currency. Therefore, it is important for the management to consider the impact of the choice of presentation currency on the financial statements and to clearly communicate the reasons for the choice in the notes to the financial statements.

In addition, it is important for the management to consider the needs of different groups of users, such as investors, creditors, and regulators, when choosing the presentation currency, as each group may have different needs and preferences.

In any case, it is important to be transparent and disclose the reasons for choosing the presentation currency in the notes to the financial statements.

Exchange Rates Used for Translation

According to International Accounting Standard 21 (IAS 21), the presentation currency value should be used on the date of the statement of financial position (balance sheet) in which the financial statements are presented. This means that all assets, liabilities, and equity should be translated into the presentation currency using the exchange rate at the date of the statement of financial position.

For example, if a company's functional currency is the U.S. dollar and its presentation currency is the Euro, the company's assets, liabilities, and equity will be translated into Euros at the exchange rate on the date of the statement of financial position.

It is important to note that the exchange rate used for translation should be the rate at the date of the statement of financial position, not the average exchange rate for the period, as this would not reflect the real value of the assets and liabilities at the date of the statement.

The income statement should be translated using the exchange rate on the transaction date, not on the statement date, as it would be more accurate, a consistent with the concept of matching revenues and expenses, and also it will be easier to compare results between different periods.

Additionally, it is important to disclose the exchange rates used for translation in the notes to the financial statements, along with the impact of the translation on the financial statements.

Currencies Besides Functional and Presentation Currency

Besides functional and presentation currency, there are other types of currencies that may be relevant for financial reporting:

Reporting currency: This is the currency in which an entity's financial statements are prepared and presented for internal management use. It may be different from the functional and presentation currency.

Foreign currency: This is a currency other than the functional currency of an entity. It is used when an entity enters into transactions or has assets or liabilities denominated in a currency other than its functional currency.

Base currency: This is the currency that is used as a reference or benchmark for financial reporting. It is typically the currency of the country where the entity is headquartered or the currency of the country where the majority of the entity's operations are conducted.

Hyperinflationary currency: This is a currency that is experiencing very high inflation, which can make financial reporting difficult. According to IAS 29, Financial Reporting in Hyperinflationary Economies, entities operating in a hyperinflationary economy are required to present their financial statements in a currency that is not hyperinflationary.

Consolidated currency: This is the currency that is used to present the financial statements of a group of entities that are consolidated together. It is usually the currency of the parent company or the currency that is most relevant to the primary users of the consolidated financial statements.