what is a functional currency 
popular with multinationals functional currency represents the primary economic environment in which an entity generates and expends cash it is the main currency used by a business in its business dealings understanding a functional currencyas the financial statements of a business are reported in only one currency the dealings or transactions that are done in another currency must be converted back to the principal currency used on the financial statements the international accounting standards ias and generally accepted accounting principles gaap offer guidance on the translation of foreign currency transactions the financial accounting standards board fasb was the first regulatory body to present the idea of a functional currency under their statement of financial accounting standards sfas no 52 1 choosing a functional currencythe world s economies have grown increasingly interdependent multinational corporations recognizing the integration of world markets including the trade of commodities and services and the flow of international capital are thinking global to remain competitive with international operations comes the tough choice of selecting a functional currency which must address several financial reporting issues including determining appropriate functional currencies accounting for foreign currency transactions and converting financial statements of foreign subsidiaries into a parent company s currency for consolidation factors may include finding the currency that most affects sales price for retail and manufacturing entities the currency in which inventory labor and expenses are incurred may be most relevant ultimately it s often management s judgment between a local currency that of a parent or the currency of a primary operational hub it can be difficult to ascertain overall business performance when a variety of currencies are involved therefore both u s gaap and ias outline procedures for how entities can convert foreign currency transactions into the functional currency for reporting purposes at times a company s functional currency may be the same currency as the country where it does most of its business other times the functional currency may be a separate currency from the currency in which a firm is headquartered 