Functional Currency is the main currency use by the company or entity, it is the currency that represents the company’s main economic operation such as revenue and expense. Most of the transactions will make through the functional currency. It reflects the transaction, event, and condition relevant to the entity.
The transaction in other currencies must translate to functional currency and present in the financial statement. The financial statement only presents one currency so it must be the main one.
Determine the functional currency
There are several factors which determine the functional currency of the company:
- The majority of revenue and expense in the company. The company may generate income and expense in various currencies. The functional currency is the one that represents most of the company transactions. The other currencies are considered foreign currency transactions.
- The currency impacts to product or service of the company. The main currency will have influence over the company product or service’s price which will result in revenue amount.
- The currency of the countries which has a direct influence on the company’s policy. Most of the time, the currency of the country where the company located will represent the company’s functional currency.
The local currency is the currency of the country in which the company/subsidiary is operating in. It may be the same or different from the company’s functional currency. There is no requirement for the company to use the local currency as the functional currency. However, the local government may require the company to prepare the regulation report in local currency for compliance. Even in this circumstance,
Functional Currency Vs Presentation Currency
|Functional Currency||Presentation Currency|
|It is the currency that represents the company’s business economy. It depends on the factors above.||It is the currency which we used to record the transaction in the financial statement. It is the currency in which financial statements are presented.|
|The company cannot select a functional currency. It is the matter of fact which best fit the company.||The company can choose the currency which they want to present in addition to functional currency.|
Change in Functional Currency
Once the functional currency has been decided, we should not have to change it frequently. The change can happen only when there are changed in the nature of the transaction, event, or relevant condition which impact the entity.
Functional currency change should be applied from the date of the change to the financial statement. The change should only apply prospectively. And it will impact to a whole set of financial statements.
The company needs to translate all the asset, liabilities, and equities into new functional currency on the date of the change. The new transactions must be translated and recorded with the functional currency.