Functional Currency
Determining the Functional Currency
The functional currency is the primary currency of the economic environment in which an entity generates and spends cash. It determines whether foreign financial statements require translation or remeasurement.
- Consider the currency influencing sales prices.
- Evaluate the currency of labor and operating costs.
- Review financing activities.
- Analyze where cash is generated and retained.
Tip
Always identify the functional currency before deciding which accounting method applies.
Summary
The functional currency drives nearly every foreign currency accounting decision under U.S. GAAP.