Definition
Presentation Currency refers to the currency in which an entity’s financial statements are presented. This can be different from the functional currency, which is the currency of the primary economic environment in which the entity operates. Differences between presentation currency and functional currency typically arise in multinational groups with subsidiaries operating in different countries, necessitating the use of a common presentation currency for consolidated financial statements.
Examples
Example 1: Multinational Corporation
A multinational corporation headquartered in the United States with subsidiaries in Europe might have the USD as its presentation currency. Each subsidiary operates in its local currency (functional currency), such as EUR or GBP, but all financial results are translated into USD for the consolidated financial statements.
Example 2: Currency Change
An entity headquartered in Canada may decide to change its presentation currency from CAD to USD to align better with its investor base and competitors, even though its local operations continue to use CAD as the functional currency.
Frequently Asked Questions (FAQs)
Q1: What is the main difference between functional currency and presentation currency? A1: The functional currency is the currency of the primary economic environment in which the entity operates, while the presentation currency is the one used for reporting the financial statements.
Q2: Why might an entity choose a different presentation currency? A2: Entities may choose a different presentation currency to align with their parent company’s currency, investor expectations, or the currency of the country where the majority of business activities are conducted.
Q3: Can an entity change its presentation currency? A3: Yes, an entity can change its presentation currency, but this change must be disclosed and justified in the financial statements.
Q4: What standard governs the translation of functional currency to presentation currency? A4: Detailed rules for translating the functional currency to the presentation currency are provided in Section 30 of the Financial Reporting Standard applicable in the UK and Republic of Ireland, and also under IFRS and US GAAP as applicable.
Related Terms
Functional Currency
The currency of the primary economic environment in which the entity operates.
Consolidated Financial Statements
Financial statements that present the assets, liabilities, equity, income, expenses, and cash flows of a parent company and its subsidiaries as those of a single economic entity.
Currency Translation
The process of converting the financial statements of a subsidiary from its functional currency to the presentation currency of the parent company.
Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102)
A comprehensive framework for financial reporting, applicable to entities in the UK and Republic of Ireland.
Online References
Suggested Books for Further Studies
- “International Financial Reporting Standards (IFRS) A Practical Guide” by Hennie van Greuning
- “Wiley IFRS: Practical Implementation Guide and Workbook” by Abbas Ali Mirza, Graham Holt, and Liesel Knorr
- “Financial Accounting Theory” by William R. Scott
- “Contemporary Issues in International Financial Reporting: A User-Oriented Approach” by Paul Rosenfield
Accounting Basics: “Presentation Currency” Fundamentals Quiz
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