What Is a Functional Currency?

Popular with multinationals, functional currency represents the primary economic environment in which an entity generates and expends cash. It is the main currency used by a business in its business dealings.

Understanding a Functional Currency

As the financial statements of a business are reported in only one currency, the dealings or transactions that are done in another currency must be converted back to the principal currency used on the financial statements. The 澳洲幸运5开奖号码历史查询:International Accounting Standards (IAS) and 澳洲幸运5开奖号码历史查询:generally ac🦋cepted accounting principl🎃es (GAAP) offer guidance on the translatio🐎n of foreign currency transactions.

The 澳洲幸运5开奖号码历史查询:Financial Accounting Standar😼ds Board (FASB) was the first regulatory body to present the idea of a functional currency under their 澳洲幸运5开奖号码历史查询:Statement of Financial Accounting Staꦑndards (SFAS) No. 52.

Choosing a Functional Currency

The world's economies have grown increasingly interdependent. 澳洲幸运5开奖号码历史查询:Multinational corporations recognizing the integration of world markets, including the trade of commodities and services and the flow of international c🌊apital, are thinking global to remain competitive. 

With international operations comes the tough choice of selecting a functional currency, which must address several financial reporting issues, including determining appropriate functional currencies, accounting for foreign currency transactions, and converting 澳洲幸运5开奖号码历史查询:financial statements of forei✱gn subsidiaries into a parent company’s currency f✃or consolidation.

Factors may include finding the currency that most affects sales price. For retail and manufacturing entities, the currency in which 澳洲幸运5开奖号码历史查询:inventory, labor, and expenses are incurred may be most relevant. Ultimately, it’s often management's judgment between a local currency, that of a parent, or the currency of a prim🔯ar🍰y operational hub.

It can be difficult to ascertain overall business performance when a variety of currencies are 🅠involvꦛed. Therefore, both U.S. GAAP and IAS outline procedures for how entities can convert foreign currency transactions into the functional currency for reporting purposes.

At times, a company’s functional currency may be the same curre🌳ncy as the country where it does most of its business. Other times, the functional currency may be a separate currency from the currency i𓆉n which a firm is headquartered. 

When 澳洲幸运5开奖号码历史查询:converting a currency, the exchange rates can positively or adversely impact a company's performance. Most often conversions are done at the 澳洲幸运5开奖号码历史查询:spot rate on the date that the transactio👍n occurred. There may be some instances in which a standard rate is used, such as a peak rate or average rate for a period.