Functional currency vs presentation currency
Each, defined
Functional currency
Functional currency — The currency of the primary economic environment in which the entity generates and spends cash — a judgment from cash-flow, sales-price, expense and financing indicators.
Presentation currency
Presentation currency — The currency the statements are shown in. ASC 830 calls it the reporting currency; IAS 21 the presentation currency — we use the latter.
Side by side
| Functional currency | Presentation currency | |
|---|---|---|
| Decided by | Where the entity operates | How the group reports |
| Conversion into it | Remeasurement, through the P&L | Translation, through OCI |
| How many | One per entity | One per set of statements |
How they relate
A German subsidiary of a US company usually has the euro as its functional currency: it sells, pays staff and borrows in euros. Its transactions in other currencies are remeasured into euros.
The US parent reports in dollars. The subsidiary's euro statements are translated into dollars for consolidation, and the translation difference goes to other comprehensive income, not the P&L.
Questions
- How is functional currency chosen?
- Under ASC 830, by the currency of the primary economic environment: where the entity generates and spends cash.
- What is the difference between remeasurement and translation?
- Remeasurement converts foreign-currency items into the functional currency, through the P&L. Translation converts functional-currency statements into the presentation currency, through OCI.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for a realized foreign exchange gain or lossBook a foreign-currency invoice at the rate on the invoice date. When it is collected at a different rate, debit Cash for the dollars received, credit Accounts receivable for the dollars originally booked, and book the difference as a realized foreign exchange gain or loss.Entry
- Journal entry for an unrealized FX revaluationAt each month-end, remeasure open foreign-currency receivables and payables at the closing rate: debit the receivable and credit Foreign exchange gain when the dollar value has risen, or the reverse for a loss. The gain is unrealized until the item settles.Entry
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.