When preparing financial statement a company must determine its functional and presentation currencies.
The functional currency is the currency of the primary economic environment where the entity operates, in most cases this will be the local currency (e.g. Euro in Ireland, GBP in UK)
When determining the functional currency, an entity should consider the following factors:
Primary factors
- The currency than mainly influences sales prices for goods and services
- The currency of the country whose competitive forces and regulations mainly determine the sales price of goods and services
- The currency that mainly influences labour, material and other costs of providing goods and services.
Secondary factors
- The currency from which issuing debt and equity is generated
- The currency in which receipts from operating activities are usually retained
What’s a presentation currency?
The presentation currency is the currency in which the entity presents its financial statements and this may be different from the functional currency, (e.g. If the entity in question is a foreign owned subsidiary. It may have to present its financial statements in the currency of the parent company, even though that is different from their normal trading currency).