Functional Currency

Every business entity in a group has a functional currency, determined by looking at factors such as the currency that mainly influences its sales prices, the currency of the country whose competition and regulations set those prices, and the currency in which wages and materials are paid.

For example, a subsidiary based in Brazil that sells to Brazilian customers in reais and pays Brazilian staff would usually have the Brazilian real as its functional currency. But an oil company in that country that sells oil in US dollars and borrows in dollars might have the dollar as its functional currency.

Transactions in other currencies are foreign currency transactions and are remeasured into the functional currency, with gains and losses usually going through profit. Then, if the group presents its accounts in another currency, the entity's statements are translated into that presentation currency.

Functional currency is determined by the facts, not chosen freely, and is changed only if the underlying circumstances change. Both IFRS and US GAAP use the concept.