What is a '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.
BREAKING DOWN '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.