Functional Currency
Candlefocus EditorFunctional currency is the primary currency in which a company conducts its business and accounting practices. It is the currency in which the company's transactions are denominated and in which the company's financial statements are reported. The functional currency is not necessarily the currency of the country in which the company is headquartered, and may also be different from the currency of the country in which the company resides.
When a company operates in more than one currency, it must adjust the dollars, euros, yen and any other foreign currency it receives and pays according to the current exchange rates, translating these currencies into the functional currency. This process, called currency exchange, is part of the company’s financial reporting, done in order to ensure the accurate representation of its finances for the reporting period.
Determining Functional Currency
The International Accounting Standards (IAS) and generally accepted accounting principles (GAAP) provide guidelines for determining the functional currency, however each company determines which currency is most relevant to their business. The functional currency should reflect the majority of the business operations in terms of source of revenue or taxation and the currency used to purchase or sell goods and services.
It is important to note that if a company operates in multiple countries, it is possible for one company to have multiple functional currencies depending on its geographical area of operations. Additionally, some companies may choose to report in one currency while their functional currency is another.
Functional Currency Advantages
Compared to reporting in a foreign currency, reporting in a functional currency provides advantages, primarily being a simpler accounting system as it eliminates the need for foreign currency transactions. Simplifying the manner in which data is gathered, transactions are processed and reported also allows for more accurate and reliable financial reporting. Additionally, using a functional currency helps investors and analysts better understand the company’s operations since the currency is familiar to both parties.
Conclusion
The functional currency is the primary currency in which a company conducts its business and financial operations. It is important to note that despite the IAS and GAAP providing guidelines for determining which currency is most relevant for a company, each company must choose the currency that is most appropriate for its operations. Finally, using a functional currency helps companies save time and money, as well as ensure accurate reporting for investors and analysts.