Deciding Functional Currency in Case of Mixed Primary Indicators
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- By Taxmann
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- Last Updated on 10 January, 2024
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Para 9 of Ind AS 21, The Effects of Changes in Foreign Exchange Rates, states that the primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency:
(a) 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
(b) the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).
The following factors may also provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities (i.e issuing debt and equity instruments) are generated.
(b) the currency in which receipts from operating activities are usually retained.
When the primary indicators fail to provide a clear answer, the management uses its judgement to determine the functional currency giving priority to the primary indicators. This story discusses a case where primary factors provide mixed results and entity is confused in determining the functional currency for financial reporting purpose.
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