Functional and Presentation Currency

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International Accounting Standard 21 (IAS 21) defines functional currency as “the currency of the primary economic environment in which the entity operates”.

The same Standard defines presentation currency as “the currency in which the financial statements are presented”.

The functional currency is determined by looking at a number of relevant factors. This currency should be the currency in which an entity usually generates and spends cash. Functional currency should be the one in which the business transactions of an entity are normally denominated. All of the transactions which are not in the functional currency are treated as foreign transactions. Following five factors need to be considered when determining a functional currency. Functional currency is the 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 the most influential factors in the determination of functional currency.

Functional currency of an entity reflects the transactions, events, and conditions under which the entity operates and conducts its business. Ones the functional currency has been decided, it does not change. A functional currency should only be changed if there is a change in the nature of underlying transactions, events, and relevant conditions.

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

An entity can present its financial statements in any currency. Usually they are presented in the functional currency; therefore usually the functional currency and the presentation currency is the same. If the presentation currency differs from the functionally currency, the financial statements should be translated into the presentation currency. 

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