Web.*Rates are subject to change without notice. Web.ģ.”Translation Exposure.” Investopedia. Web.Ģ.”Functional and Presentation Currency.” Financial Analysis. “IAS Plus.” IAS 21 – The Effects of Changes in Foreign Exchange Rates. Translation risk is unavoidable in converting results where if the reporting currency is stronger, the results will be favorable and vice versa.ġ. In some companies, typically in the ones that are small or medium scale and does operate in a single country, both functional currency and reporting currency are the same. The difference between functional currency and reporting currency is that functional currency is the currency in which the company transactions are conducted while reporting currency is the currency in which financial statements are presented. Summary – Functional Currency vs Reporting Currency Reporting currency is affected by the exchange rate. Reporting currency for subsidiaries depends on the currency used by the company headquarters.įunctional currency is not affected by the exchange rate. Reporting currency is the currency in which financial statements are presented.įunctional currency depends on the currency of the country that the company operates in. All these subsidiaries report their results in US Dollar, including XYZ.īelow is the details of revenue, cost of sales, and gross profit of XYZ, which are based on the transactions for the financial year of 2016.įigure 1: Relationship between functional currency and reporting currency What is the difference between Functional Currency and Reporting Currency? Functional Currency vs Reporting Currencyįunctional currency is the currency of the primary economic environment in which the entity operates. Company ABC also has subsidiaries in other European countries and Asian countries. Resulting exchange differences are recognized in other comprehensive income/loss in the income statement.Į.g., Company XYZ’s parent company is Company ABC, which is located in the USA. Income and expenses in the income statement are translated at exchange rates at the dates of the transactions.Assets and liabilities in the balance sheet are translated at the closing rate at the date of the balance sheet (financial year end).IAS 21 provides the following guidelines for converting results into the reporting currency. This common currency is usually the currency in the country where the corporate headquarters is based. For this reason, all the operations in every country will be converted into a common currency and reported in financial statements. If results are reported in each country in different currencies it becomes difficult to compare results and calculate results for the entire company. Such companies operate in many countries that have various functional currencies. This may be different from the functional currency for some companies, especially for multinational companies. Thus, it is also known as the ‘presentation currency’. Reporting currency is the currency in which financial statements are presented. Since the national currency in France is Euro, XYZ conducts all its transaction in Euro. Usually, this is the national currency of the country in which the company is situated.Į.g., Company XYZ is a wholly owned subsidiary company situated in France. In other words, this is the currency in which the company conducts business transactions. Side by Side Comparison – Functional Currency vs Reporting CurrencyĪccording to IAS 21, functional currency is the “currency of the primary economic environment in which the entity operates”. The key difference between functional currency and reporting currency is that functional currency is the currency of the primary economic environment in which the entity operates whereas reporting currency is the currency in which financial statements are presented.Ĥ. IAS 21- ‘The Effects of Changes in Foreign Exchange Rates’ provides definitions to the terminologies of these two types of currencies. Some companies conduct transactions in one currency and record the financial results in a different currency thus, giving rise to two types of currencies, functional and reporting currency. Key Difference – Functional Currency vs Reporting Currency
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