The document discusses functional currency, which is the currency of the primary economic environment where a company operates. A company's functional currency may differ from its home or reporting currency. To determine functional currency, management considers factors like autonomy of foreign operations, volume of transactions in various currencies, proportion of cash flows in each currency, and debt service currency. An example given is of a Chinese company with its largest market and revenues in US dollars, making the US dollar its functional currency rather than the Chinese yuan.

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/international-financial-management/functional-
currency-meaning-importance-how-to-determine
Functional Currency

2. 1. Meaning
2. Converting Other Currency to Functional
3. How to Determine Functional Currency?
4. Examples
5. Reference
Content

3. Functional Currency (FC), as the word suggests, is the currency of the location or the economic environment in which a
firm works.
In simple words, we can say that it is the home currency of the country in which the company is headquartered. But that
may not be the case always. The local currency and the FC can be different.
Meaning

4. It is possible that functional and reporting currency could be different. That is why both U.S. GAAP and IAS detail
processes on how firms can switch their transactions in other currencies to FC.
When converting foreign currency into FC, a company must follow this process:
• It must first identify its FC.
• Then it needs to convert all transactions into the FC.
• Now, the company needs to report the effect of converting the transactions as per the IAS 21.
Converting Other Currency to Functional

5. To determine the functional currency of a company’s foreign operations, the management must look at the following
points:
• Autonomy
• Transactions Volume
• The proportion of Cash Flows
• Debt Service
How to Determine Functional Currency?

6. A Chinese company has its headquarter in Beijing, but operates in the U.S. as well. In fact, the U.S. market accounts for
more than 50% of the company’s total revenues. So, the functional currency for this company would be the U.S. dollar
and not the Chinese Yuan.
In cases where a company has operations in two or more currencies, and all markets are equally important, then it is up to
the management to decide the functional currency.
Examples

7. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/international-financial-management/functional-currency-meaning-importance-how-
to-determine