When it is not clear what the functional currency is, an accountant must use professional judgment to choose the functional currency. What is the main criterion upon which the choice should be based?

Question

Quizplus · Accepted Answer

The main criterion upon which the choice should be based is whether it faithfully represents the economic effects of the transactions and events. This means that the functional currency should reflect the underlying activities and operations of the entity, and should provide a meaningful basis for measuring financial performance and making business decisions. Factors that may be considered in making this determination include the nature and extent of the entity's operations, the currency in which sales and expenses are denominated, and the currency in which capital is raised and repatriated. Ultimately, the choice of functional currency should be based on a careful analysis of the economic substance of the entity's activities, rather than the form or legal structure of the entity.

When It Is Not Clear What the Functional Currency Is