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FR And SBR: IAS 21 Financial Reporting

Relevant to ACCA Qualification paper FR and more specifically to SBR

IAS 21 deals with the foreign currency. There are two aspects to consider here:

1. Functional currency: This is the currency of the primary economic environment in which the entity operates. This normally means that functional currency will be the entity’s own currency with all other currency being foreign currency. 


2. Presentation currency: This is the currency in which the entity presents its financial statements.

Normally, these two currency will be same. But, for consolidation accounts purpose, the functional currency may need to be translated in to presentation currency i.e., parent currency.

So, an entity can actually choose its presentation currency but cannot choose the functional currency as functional currency will be determined by several factors. Today, We will discuss about these factors in this article.

Functional currency is normally the currency of primary economic environment of entity which means that in which currency do the entity generate and spend the cash. The primary factor to determine this is the sales and cost of sales/other expenses. For e.g., in which currency do the entity sale its products and in which currency do they spend for cost of sales/other expenses.

Let’s take an example for primary factors.

A US company S LTD set up its subsidiary in Nepal C LTD because of the cheap labor costs in Nepal. C LTD Sell all its product to US in $. C LTD buys all its supplies from US in US$ but pays labor in NPR.

Now, here the functional currency of C LTD is clearly the US$ because all their sales are in US$ and major part of cost of sales i.e., purchases are in US$ despite being the labor cost in NPR. So judgement should be used in deciding the functional currency. 


But what will happen if the sales are in US$ and cost of sales are in Japanese Yen and NPR. ?

In this case, it’s very difficult to determine the functional currency from the two primary factors as these two primary factors become more difficult in determination. So the additional factors need to be considered in determining the functional currency.


The additional factors can be Financing and Retention of cash flows from operating activities. For example, in which currency financing is obtained such as equity or debt instruments. And in which currency does the entity retains cash from operating activities.

I hope you get some flows to get in to this type of questions. This type was examined in the June 2014 sitting of the former P2 examinations. There are further issues in this standard IAS 21 such as foreign currency transaction and translation which you can refer from your learning and content provider text books or practice materials.

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Written by a member of BOD Team for CCA School Of Accountancy.