Functional currency

Functional currency is the currency of the main economic environment in which an entity operates. It is a conclusion based on facts. It is not automatically the currency used for invoices, local records, tax returns, or the parent company's reports. ASC 830-10-45-2 directs an entity to identify the currency of the primary economic environment in which it generates and spends cash.

Start with the economic evidence. Ask which currency mainly influences sales prices, labor, materials, and other operating costs. Then consider financing, cash retention, and the degree to which the foreign operation depends on its parent. Record evidence that supports and challenges the conclusion. A convenient system setting or management preference is not evidence.

For example, a Canadian sales office may keep books in Canadian dollars while its prices, inventory purchases, and financing are set in U.S. dollars. The local ledger currency alone does not settle the question. If the evidence supports the U.S. dollar, foreign-currency balances are remeasured into that functional currency before the reporting package is prepared.

The conclusion controls the next step. Transactions denominated in another currency are remeasured into the functional currency. A foreign entity whose functional currency differs from the reporting currency is translated. A later change in functional currency is applied prospectively when economic facts change; it is not an election to manage reported income.