What is Functional Currency?
Functional currency is the currency of the primary economic environment in which the entity operates. Under IAS 21, every entity must determine its functional currency by looking at the currencies that influence sales prices, labor costs, financing and other operating cash flows.
How It Works
- Assess the currency that mainly influences sales prices and costs.
- Consider the currency in which financing is obtained.
- Once determined, do not change unless the underlying economic conditions change.
- All foreign currency transactions are translated into the functional currency for accounting.
Saudi Context
Most Saudi-based entities have SAR as their functional currency, although petrochemical exporters often consider USD because oil and feedstock prices are dollar-denominated.
Example
A trading company that buys in USD, sells in SAR and finances itself in SAR typically determines SAR as its functional currency.