The functional currency of an entity can be understood literally as the currency in which the entity functions. The choice of functional currency is a judgment which must be made under IAS 21. The judgment involves assessing the facts, and deciding the currency on which the entity is most dependent economically. For most entities, the functional currency is a clear judgment, in that most entities operate primarily within a single economy or currency zone.

However IAS 21 does offer some guidance should the judgment prove difficult. This can happen if more than one currency is important to the entity and it is not clear which is the most significant.

IAS 21 requires that the entity consider:

• The currency which most affects sales prices; and
• The currency in which purchases and other costs are incurred.
• The currency of the most significant providers of capital; and
• The currency in which operating receipts are retained.

(Explanation of functional currency 2 marks)
(Any 3 factors @ 1 mark 3 marks)

Under IAS 21 an asset purchased in foreign currency is translated into the functional currency of the entity at the date of purchase or revaluation and not restated otherwise. (1 mark)

Hence there are two movements here:
Cost of property: DH40 million / 1.25 = GH¢32 million (1 mark)

Depreciation for year: GH¢32 million / 20 years = GH¢1.6 million (charged to profit or loss)         (1 mark)
Carrying value at year end: GH¢30.4 million

Revalued amount: DH¢45 million / 1.125 = GH¢40 million              (1 mark)

Revaluation gain: (40m – 30.4m) = GH¢9.6 million (credited to OCI)          (1 mark)

i. The currency that mainly influences sales prices for goods and services.
ii. The currency of the currency whose competitive forces and regulations mainly determine the sales price of goods and services.
iii. The currency that mainly influences labour, material and other costs of providing goods and services.

iv. The currency in which funding from issuing debt and equity is generated.
v. The currency in which receipts from operating activities are usually retained.                                                                (Any 3)