Functional Currency

AAA

DEFINITION of 'Functional Currency'

The primary type of money that a company uses in its business activities. Often a company's functional currency is the same as that of the nation in which it is headquartered, though this is not necessarily the case. The functional currency is most relevant for multinational corporations that conduct business in multiple currencies.


For example, a Canadian company with the bulk of its operations in the United States would consider the U.S. dollar its functional currency, even if financial figures on its balance sheet and income statement are expressed in terms of Canadian Dollars.

INVESTOPEDIA EXPLAINS 'Functional Currency'

It is often very difficult to ascertain overall business performance when a variety of currencies are involved, however. Therefore, both U.S. GAAP and IAS outline procedures for how these corporations should convert foreign currency transactions into the functional currency for reporting purposes. Foreign exchange is typically not converted in real time, however, which can result in losses and gains due to exchange rate fluctuations.

RELATED TERMS
  1. Suriname Guilders

    The official currency of Suriname until 2004, when it was replaced ...
  2. Complementary Currency - CC

    A currency used in combination with other currencies, such as ...
  3. Facebook Credits

    Virtual currency (currency used only on the internet) that can ...
  4. Currency ETF

    Exchange-traded funds (ETFs) invested in a single currency or ...
  5. Currency

    A generally accepted form of money, including coins and paper ...
  6. Quote Currency

    The second currency quoted in a currency pair in forex. In a ...
RELATED FAQS
  1. Why would you use the TTM (trailing twelve months) rather than the data from the ...

    Public companies report their yearly financial statements along with an annual report. However, financial professionals are ... Read Full Answer >>
  2. Why is it important for an investor to understand business accounting?

    Investors use financial statements to obtain valuable information used in valuation and credit analysis of companies. Therefore, ... Read Full Answer >>
  3. What are the business consequences of using FIFO vs. LIFO accounting methods?

    If a company uses a first-in, first-out accounting method (FIFO), it's likely that its reported earnings will be higher than ... Read Full Answer >>
  4. What advantages does EBTIDA-margin have over other profitability ratios?

    The advantages that EBITDA margin has over other profitability ratios is that it measures a company's financial performance ... Read Full Answer >>
  5. How do you analyze inventory on the balance sheet?

    In accounting, inventory represents a company's raw materials, work in progress and finished products. Financial professionals ... Read Full Answer >>
  6. What does the operating cash flow ratio measure?

    The operating cash flow ratio measures a company's ability to meet its short-term, or current, liabilities, also known as ... Read Full Answer >>
Related Articles
  1. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  2. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  3. Personal Finance

    The Currency Board: Understanding The Government's Bank

    Currency board, central bank - what's the difference? Find out more about this little-known monetary authority.
  4. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  5. Forex Education

    Dollarization Explained

    Find out how fledgling economies can find some stability in their currency and attract foreign investment.
  6. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  7. Economics

    Explaining the EBITDA Margin

    EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
  8. Fundamental Analysis

    What is Quantitative Analysis?

    Quantitative analysis refers to the use of mathematical computations to analyze markets and investments.
  9. Economics

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.
  10. Economics

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.

You May Also Like

Hot Definitions
  1. Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment ...
  2. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  3. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  4. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  5. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  6. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
Trading Center