IAS 21 The Effects Of Changes In Foreign Exchange Rates |

Functional currency and Presentation currency

The two definitions in functional currency and presentation currency to start with:

  1. Presentation currency is the currency that a group reports its consolidated profits in. This is a free choice available to a group and directly affects the headline reported profit. Functional currency and Presentation currency
  2. Functional currency is the currency of the local environment in which each individual member company of a global group operates. In other words, functional currency is determined by what drives that specific member company. This is factual, and is therefore not a choice. Functional currency and Presentation currency

Relevance on consolidation

These two concepts interact through the consolidation process. Each member company first determines its profits in its own individual functional currency. Then, … Read more

Consolidation of a foreign operation

In the past all kinds of different methods of translating foreign currency financial statements existed, called current rate method and temporal rate method.

IAS 21.39 defines the current (very practical) approach to translation of foreign currency financial statements for consolidation in the presentation currency as follows:

‘The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

  1. assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
  2. income and expenses for each statement presenting profit or loss and other comprehensive income
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