Page 9 - 15. COMPILER QB - INDAS 21

Q9. (MTP March 21 & Exam Nov. 19 – 4 Marks)

What is the functional currency of an entity?
What are the primary and secondary factors that influence determination of functional currency?
SOLUTION

Functional currency is the currency of the primary economic environment in which the entity operates. In
this regard, the primary economic environment will normally be the one in which it primarily generates and
expends cash i.e. it operates. The functional currency is normally the currency of the country in which the

entity is located. It might, however, be a different currency.
The following are the factors that influence determination of an appropriate functional currency:
1. Primary indicators:
(a) the currency:
i. that mainly influences sales prices for its goods and services. This will often be the currency in which
sales prices are denominated and settled; and

ii. of the country whose competitive forces and regulations mainly determine the sales prices of its
goods and services.
iii. the currency that mainly influences labour, material and other costs of providing goods and services.
This will often be the currency in which these costs are denominated and settled.

2. Secondary indicators:
Other factors that may provide supporting evidence to determine an entity’s functional currency are-
(a) the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are
generated; and
(b) the currency in which receipts from operating activities are usually retained.

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