Question

IAS 21 identifies various currency labels. What is the difference between a functional currency and a presentation currency? Does the company have any choice in selecting these? Discuss. Use references from the IAS standard in answering this question.

Answer 1

IAS 21 identifies various currency labels. What is the difference between a functional currency and a presentation currency?

Functional currency is the currency of the primary economic environment in which you operate. Your functional currency is NOT a matter of your choice, but the matter of your economic environment. You should determine it by the careful assessment of factors like the primary currency in which you make sales, cost of sales, etc. In fact, it is the functional currency in which you keep your accounting records and book the transactions. Presentation currency is the currency in which you present your financial statements. The presentation currency is any currency that you choose.

Does the company have any choice in selecting these? Discuss. Use references from the IAS standard in answering this question.

First of all, you have to assess your primary economic environment to find out your functional currency. In other words, you need to assess the economic effects of the underlying transactions, events and conditions relevant for you. However, sometimes these underlying transactions, events or conditions change and in this case, your functional currency changes, too.

It should be on the specific date when the circumstances change. So it should be on the first day of your reporting period. So, if your reporting period starts on January 1, do it on January 1. Why? Well, because it will be easier for you to translate all the balances to your presentation currency at the beginning of the reporting period (you will deal with translation from one functional currency, not two different functional currencies during the same period).

The standard IAS 21 requires applying all the procedures related to the change in functional currency prospectively from the date of change. No restatement of previous period. You simply need to translate all items of assets and liabilities into the new functional currency using the exchange rate at the date of change. For non-monetary items, this amount will be the item’s new historical cost. It means that you are NOT going to update the recalculation at the year-end with the closing rate.