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Foreign exchange in individual financial statements

Functional currency

1.1 Definition of functional currency

‘Functional currency is the currency of the primary economic
environment in which an entity operates’ (IAS 21, para 8).

1.2 Determining functional currency

IAS 21 The Effects of Changes in Foreign Exchange Rates says that an entity should
consider the following primary factors when determining its functional currency:

 the currency that influences sales prices

 the currency that influences labour, material and other costs.

If the above are inconclusive, the following secondary factors should be considered:

 the currency in which finance is obtained

 the currency in which operating receipts are retained.

Note that a subsidiary will have the same functional currency as its parent if it
operates with little autonomy.

Illustrations and further practice

Now try TYU question 1 from Chapter 6

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