What is functional currency, and why it matters

Functional currency is often the currency of the company’s financial statements.?

While a transactional currency is determined by the currency of a single transaction, functional currency takes into account the influence of currency on the company’s sales, operations and primary funding.?

For example, let’s say a US-based company operates a subsidiary in Australia.?

Since the subsidiary's sales, expenses, and funding are mainly in AUD, the functional currency of the subsidiary would be AUD. This makes it easier and more accurate when reporting to the headquarters in the US.

Likewise, the US headquarters would choose USD as its functional currency when disclosing its business performance to the board and investors.?

However, what if the subsidiary has just entered a sales contract of HKD 1,000,000? How would the transaction be recognised in the Australia subsidiary’s AUD statement, and subsequently in the headquarter’s USD statement? Is it as simple as a mere conversion??

From the next post, we'll delve into these questions further and explore common questions on dealing with multiple currencies.