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Unlike in current accounting practices in India, there is a need to identify Functional Currency for every entity whose financial statements are being prepared under IND-AS/ IFRS whenever it is applicable to them (based on the roadmap suggested by MCA for convergence of IND-AS in India).

What does Functional Currency means?

When we look at the definition given under Ind-AS-21 “Effect of changes in foreign exchange rates” we can read it as “Functional currency is the currency of the primary economic environment in which the entity operates.”

It basically tells the reader/users of the financial statements that the currency primarily represents the business environment where this entity actually operates.

Why does an entity need Functional currency?

Unlike in past, businesses were operated in one geographical location and perhaps there was no question to ponder about the currency, which can  be different in that country where such business actually operated. However, after the globalization and limitless environment of doing business, there are many transactions, forces, factors which can directly/ indirectly influence the business primary operations and hence there was a need to know what is a currency which is actually being used/ exchanged which truly reflects business and the reader/ user of financial statements can actually understand the transactions which are being made other than its primary used currency so that one can quantify the effect of how much foreign currency gains or losses arise for that entity.

How to identify functional currency?

As per the standard, there are some primary indicators and secondary indicators which have to be looked at while assessing functional currency of any entity-

PRIMARY INDICATORS - Standard defines that there are broadly two conditions which need to be looked into.

The FIRST one related to the currency in which the sales and cash that comes to the entity which essentially means that the currency in which good or services are Denominated and Settled and the currency of the country whose competitive forces and regulations determine the sale prices of goods/ services.


An entity which primarily prices its goods or services in local currency and creates debtors against that, and eventually these debtors are settled in same currency then local currency will be its functional currency.

But as a practice which is being followed while analyzing this clause there a catch in this, which emphasis on active market available for the goods/ services in that currency. Active market where independent sellers/ buyers decide the prices by their demand and supply curves.

Example -

There is a product which is being sold by an entity in India but there is no active market ( buyers & sellers available which eventually can decide rates by demand & supply curve) available in India and whose rates are being decided based on some reference rates which are available in some other currency outside India. Hence this shows that there some other forces which decide the rates of the goods/ services and hence it could lead to functional currency other than its local currency subject to other relevant factors.

Secondly, the currency which mainly influences labour, material and other cost of providing such goods/ services.

Which essentially means that if the significant portion of such costs which are being paid in a currency can be concluded as the entity’s functional currency subject to consider other factors as well.

SECONDARY INDICATORS - Standard defines some secondary indicators which need to be analyzed once an entity is not able to conclude evidently based on the primary indicators as mentioned above. These are currency in which financing activities are being undertaken e.g. fund raising in foreign denominated currency AND the currency in which working capital are usually maintained.

These financing and working capital indicators could be secondary to decide functional currency for an entity and one can argue that the entity’s main business is not to lend the money hence financing activities should not be considered in isolation while analyzing functional currency of any entity.

Summary & Conclusion notes

  1. There is nothing specifically which restricts to an entity while analyzing such indicators, however there could be instances where an entity will be having mix of these indicators, then management needs to define which currency reflects more useful/ logical way of being its functional currency,
  2. In India, majorly many of the public sector entities and institutions which normally operates and having various segments dealing in such goods and products might lead to a conclusion to change their functional currency to some foreign currency,
  3. Standard majorly stresses upon the primary indicators to be consider while analyzing such assessment because it tells about the initial place of environment where an entity operates,
  4. There is no group level functional currency and hence the assessment will be done on parent level and  it will be applicable individually to other group companies with some exceptions,
  5. All such assessment needs to be documented and to be updated regularly and in case there is a change in any instance then the entity needs to convert all its assets and liability into that functional currency from the date it has changed and same will be done prospectively because it will be treated as change in circumstances and will not be treated as change in accounting policy,
  6. One needs to be careful while dealing with any changes in Presentation currency (In which financial statements are being presented that could be same as functional currency or may be different) of any entity will be treated as change in accounting policy and hence CTA will be effected accordingly.  All such changes in presentation currency will be done retrospectively,
  7. An entity needs to disclose it functional currency in the financial statements accordingly,

This is not an exhaustive list of details about the assessment of functional currency and there are lot more considerations/ detailing/ judgments would be required before reaching to any conclusion. But it will surely take a big leap in many Organizations in India as they start using IND_AS/IFRS in the coming periods. 

The author can also be reached at


Published by

CA Anuj Agrawal
(IFRS/ GST Professional)
Category Accounts   Report

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