Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

FX REVALUATION AND FX TRANSLATION PROCESS

Functional currency, foreign currency and presentation currency

Functional currency is the currency of the primary economic environment in which the entity operates. All other currencies other than the functional currency are known as foreign currencies for the entity. Presentation currency is the currency in which the financial statements are presented to the investors. The entity is free to choose any currency as its presentation currency.

Primary economic environment

Financial accounting records should be maintained in the functional currency and the entity is not free to choose the same. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. The functional currency is determined separately for individual entities. There is no such thing as a “group functional currency.” The accounting standard gives the factors—primary and additional—to determine the functional currency of an entity. The functional currency is determined by applying the factors specified in the accounting standard. Once determined, it is not changed unless there is a change in those underlying circumstances.

Primary factors

Primary factors for identifying the functional currency are the currency that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and the currency of the country ...