Functional Currency is the currency in which the entity operates its economic activity. Normally functional currency is local currency but in some cases it may differ when its head office is located in another country and the company operating from head office. Following Points to be considered when determining its functional currency:
- The currency that influences sales prices for goods and services
- The currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services
- The currency that may influences labour, material and other costs of goods and services
- The currency in which funding from issuing debt and equity is generated
- The currency in which receipts from operating activities are usually retained
Every company maintain its day to day activities in its functional currency.