A company’s functional currency is the currency of the primary economic environment in which it operates, usually the currency in which it mainly earns and spends cash. Under IAS 21, each company in a group has its own functional currency, records its transactions in it, and treats every other currency as foreign.
What is functional currency?
IAS 21 defines the functional currency as the currency of the primary economic environment in which the entity operates (paragraph 8). That environment is normally where the company mainly generates and spends cash (paragraph 9). It is a matter of fact and judgement, not choice: management assesses the evidence and, once set, the functional currency changes only if the underlying transactions, events and conditions change (paragraph 13).
It is different from the presentation currency, the currency the financial statements are presented in. IAS 21 allows statements to be presented in any currency (paragraph 38). A group can present in riyals while its subsidiaries keep their books in other functional currencies, translating them for the group report. See foreign currency translation.
How is the functional currency determined?
| Indicator | The question to ask |
|---|---|
| Primary: sales prices (paragraph 9(a)) | Which currency mainly influences selling prices, and whose country’s competitive forces and regulations mainly set them? |
| Primary: costs (paragraph 9(b)) | Which currency mainly influences labour, materials and other costs? |
| Supporting: financing (paragraph 10(a)) | In which currency are debt and equity raised? |
| Supporting: cash retained (paragraph 10(b)) | In which currency are operating receipts usually kept? |
When the indicators point in different directions, management gives priority to the primary indicators and uses judgement to pick the currency that most faithfully represents the economic effects (paragraph 12). Further indicators apply to a foreign operation, such as how independent it is from its parent (paragraph 11).
What does functional currency change in the books?
Why does functional currency matter for finance teams in the GCC?
The Saudi Central Bank has stated its commitment to keeping the riyal at the official rate of 3.75 to the US dollar, so dollar transactions in a riyal company usually create small exchange differences. Groups with companies outside the Kingdom, or with suppliers and lenders in other currencies, still need each company’s functional currency settled first, because it decides which balances are foreign, where exchange differences go and how the group consolidates. Read each general ledger in its own currency before translating.
Questions people ask
Can a company choose its functional currency?
Not freely. IAS 21 makes it a conclusion from the facts: the currency of the main economic environment. Management uses judgement only when the indicators are mixed.
What is the difference between functional and presentation currency?
The functional currency is the one a company keeps its books in because of how it operates. The presentation currency is the one its statements are shown in, which can be any currency.
Can the functional currency change?
Only when the underlying transactions, events and conditions change, for example when a subsidiary moves most of its sales and costs into another currency. IAS 21 (paragraph 35) applies the new currency prospectively, from the date of the change.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.
- IFRS Foundation: IAS 21 The Effects of Changes in Foreign Exchange Rates (standard page) (read 9 October 2026)
- AASB 121 The Effects of Changes in Foreign Exchange Rates (compiled February 2016), which incorporates IAS 21: paragraphs 8 to 13, 21, 23, 28, 35 and 38 (read 9 October 2026)
- Saudi Central Bank (SAMA): SAMA Affirms Commitment to Exchange Rate Policy (May 2020) (read 9 October 2026)