Understanding Functional and Presentation Currency under IAS 21

Many UK companies operate internationally. If your business earns and spends primarily in a foreign currency, your functional currency may not be GBP — and that's okay.

Café Mundo is a growing UK-based coffee chain that originally started in London. Over the past five years, the company has expanded rapidly into continental Europe, opening dozens of outlets in France, Spain, and Italy.

Here’s how the business now operates:

• Sales: 90% of Café Mundo’s revenue is earned from its European outlets. Prices are set in euros (€), and customers pay in euros.

• Costs: Most of the staff, suppliers, and landlords are paid in euros. Only head office expenses in the UK are paid in pounds.

• Market influence: Pricing decisions are made based on local market competition in the European café industry.

• Financing: Café Mundo took out a major business loan from a French bank, denominated in euros.

• Profit retention: Earnings from European outlets are reinvested locally and held in euro bank accounts.

Despite being a UK company by incorporation, Café Mundo's day-to-day operations are overwhelmingly euro-focused.

Introducing IAS 21: Functional vs Presentation Currency

Under IAS 21 – The Effects of Changes in Foreign Exchange Rates, businesses that deal with foreign currencies must determine two key things:

1. Functional Currency

This is the currency of the primary economic environment in which the company operates. It reflects the currency that most significantly affects revenue, costs, and cash flows.

IAS 21 Definition: “The currency of the primary economic environment in which the entity operates.” (IAS 21, para 8)

Indicators to assess include:

• The currency that mainly drives sales prices and customer payments

• The currency used for paying wages, rent, and suppliers

• The currency that influences market competition

• Secondary considerations: loan currency and currency for holding profits

2. Presentation Currency

This is the currency in which the company chooses to present its financial statements. For Café Mundo, that might still be GBP (£), to align with UK shareholders and regulatory filing requirements — even if the business mostly operates in euros.

IAS 21 allows the presentation currency to be different from the functional currency — but it must apply translation rules carefully to avoid misstatements.

Conclusion: What is Café Mundo’s Functional Currency?

Despite being legally based in the UK and reporting to UK investors:

• Café Mundo earns in euros

• Spends in euros

• Sets prices based on eurozone competition

• Borrows and invests in euros

Therefore, the euro (€) is Café Mundo’s functional currency under IAS 21.
However, Café Mundo may still present its accounts in GBP (£) as its presentation currency, using appropriate translation methods.

Takeaway for UK Businesses

Many UK companies operate internationally. If your business earns and spends primarily in a foreign currency, your functional currency may not be GBP — and that's okay. The key is to:

• Assess the real economic environment, not just the country of registration.

• Apply IAS 21 accurately to determine functional and presentation currency.