Question

Class, what exactly is a functional currency and why should we be concerned with it?

Answer 1

Answer-

Functional Currency- Functional currency is the currency in which business is conducted. It is the currency that the company prepares its financial statements . A company uses cash in its transactions. So it should use one currency in preparing its statements to report the status of the company. Functional currency is related to the multinational companies as multinational companies do their business with other countries. So, it’s important to determine a particular currency as a functional currency. All the translations that occur in other currency should be converted into the functional currency. The guidelines for translating foreign currencies for financial statements are laid out in the International Accounting Standards (IAS) and generally accepted accounting principles (GAAP).

Functional currency doesn’t have to be the currency of the country in which the headquarter is situated. It can be of any currency in which the company deals.

We should be more concerned in choosing the functional currency for the company because it affects the outcomes. Functional currency is affected by different factors such as convertable prices of the two different countries etc.  As, at the time of conversion, converting prices may have positive or negative affect on the company’s financial condition.

For instance, if a US company businesses with an Indian company and it decides its functional currency as ₹ ( rupees ) , the company will have negative affect on it because US Dollar has more value than rupees.

As the sale price is important so it should be taken into consideration as the same inventory, Labour etc. is also important. Proportion  of transactions and proportion of cash flow are another factors to be noticed.So it’s important to decide functional currency after analyzing each and every factor so that company’s profits will not get affected negatively.