Topic list Syllabus reference

Definitions


Key terms
These are some of the definitions given by IAS 21.
Foreign currency. A currency other than the functional currency of the entity.
Functional currency. The currency of the primary economic environment in which the entity operates.
Presentation currency. The currency in which the financial statements are presented.
Exchange rate. The ratio of exchange for two currencies.
Exchange difference. The difference resulting from translating a given number of units of one currency into another currency at different exchange rates.
Closing rate. The spot exchange rate at the year-end date.
Spot exchange rate. The exchange rate for immediate delivery.
Monetary items. Units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. (IAS 21: para. 8)

2. 
   Functional currency
   

Each entity - whether an individual company, a parent of a group, or an operation within a group (such as a subsidiary, associate or branch) - should determine its functional currency and measure its results and financial position in that currency.

For most individual companies the functional currency will be the currency of the country in which they are located and in which they carry out most of their transactions. Determining the functional currency is

much more likely to be an issue where an entity operates as part of a group. IAS 21 contains detailed guidance on how to determine an entity's functional currency. (IAS 21: paras. 9-13)
IAS 21 states that an entity should consider the following factors in determining its functional currency:
(a)


The currency that mainly influences sales prices for goods and services (often the currency in which prices are denominated and settled)
The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services
The currency that mainly influences labour, material and other costs of providing goods or services (often the currency in which prices are denominated and settled) (IFRS 21: para. 9)
Sometimes the functional currency of an entity is not immediately obvious. Management must then exercise judgement and may also need to consider:
(a)


(b)


(с)


The currency in which funds from financing activities (raising loans and issuing equity) are generated
The currency in which receipts from operating activities are usually retained (IFRS 21: para. 10)


(b)
An entity can present its financial statements in any currency (or currencies) it chooses. IAS 21 deals with the situation in which financial statements are presented in a currency other than the functional currency.
(IFRS 21: para. 17)
Again, this is unlikely to be an issue for most individual companies. Their presentation currency will normally be the same as their functional currency (the currency of the country in which they operate).


5.3 Foreign currency transactions


There are two distinct types of foreign currency transaction, conversion and translation.