Page 9 - Finac 1 - Topic 2 - 1. The Effects of Changes In Foreign Exchange Rates

THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Functional Currency

• The primary economic environment in which an entity operates is

normally the one in which it primarily generates and expends
cash.

• In determining the functional currency of an entity, they need to
consider the following factors:

• the currency that mainly influences sales prices for goods and services and
the currency of the country whose competitive forces and regulations
mainly determine the sales price of its goods and services;
• E.g. Sales prices of goods and services are denominated and settled in this
currency.

• and
• the currency that mainly influences labour, material and other costs of
providing goods or services.

• E.g. The costs are denominated and settled in this currency.

• The following additional supporting evidence may also provide

evidence of an entity's functional currency:

• the currency in which funds from financing activities are generated, and

• the currency in which receipts from operating activities are usually
retained.
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