When it comes to the term currency, there are three different terminologies that individuals tend to mix up but are different in meaning. The three terms are functional currency, foreign currency and presentation currency.
Functional currency.
Functional currency refers to the currency of the primary economic environment in which the entity operates. When working on an entity’s accounting files, determining the functional currency is crucial.
The functional currency’s primary indicators are the currencies that affect the sales price and costs of an organisation. Secondary factors can also determine the functional currency int the event the assessment of the primary indicators is not successful. Such secondary factors include the currency of the entity’s financing activities and the currency in which receipts from operating activities are accumulated. In conclusion, the currencies in Accounting books are functional currencies. Other currencies the entity deals with are considered foreign currencies.
Presentation currency.
This currency refers to the currency presented in an entity’s financial statements. It is wise to submit financial statements in the same form of the functional currency. However, the entity is free to choose the currency presented to shareholders.
Furthermore, it is stressed that the Maltese Companies Act requires accounts to be presented in the same currency of the share capital of the company.
Foreign currency.
Currencies which are not the functional currency are to be considered as foreign currency. It applies to all entities across the world.
Exchange rate selection.
When selecting the exchange rate, the following two rules apply:
Rules for booking transactions in foreign currency
Rules for other situations
Transactions in foreign currency.
An entity purchasing goods in a currency different from the functional currency is considered a foreign currency.
The date of the transaction is considered when entering transactions for exchange rates. The reporting date rises complications. In this, the entity needs to distinguish between monetary and non-monetary items. Monetary items refer to the items resulting in a fixed or determinable number of currency units as a settlement. Monetary items are translated at the exchange rate of the day. Non-monetary items are not retranslated from the historical exchange rate.
Other situations.
Assets and liabilities are converted at the closing rates, regardless of whether they are monetary or not, are considered other situations. Income statement items are converted at tactual rates, same as with foreign currency transactions. Differences are recognised in the exchange fluctuation reserve, in such cases.
These situations include:
The process of converting from the functional currency of an entity to its presentation currency.
The process of converting a foreign operation into the presentation currency of the reporting entity.
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