{"id":10329,"date":"2023-02-25T10:59:35","date_gmt":"2023-02-25T10:59:35","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=10329"},"modified":"2026-03-19T17:57:02","modified_gmt":"2026-03-19T17:57:02","slug":"presentation-currency-functional-currency-local-currency","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/presentation-currency-functional-currency-local-currency\/","title":{"rendered":"Presentation Currency, Functional Currency, and Local Currency"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"What is the most accurate definition of the local currency?\",\r\n    \"text\": \"Which of the following best defines the local currency: any currency other than the parent currency, the currency used by the parent company to prepare financial statements, or the currency of the country in which a company operates?\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The local currency is the currency of the country in which a company operates. It refers to the national currency of the jurisdiction where the foreign entity conducts its business activities.\",\r\n      \"dateCreated\": \"2026-01-19\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/Xbr1G7tg8Fk\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>A multinational corporation is a firm that has business operations located in at least one country besides its home country. It may engage in transactions that are denominated in foreign currency or invest in foreign subsidiaries that keep their financial records in a foreign currency. This exposes the firm to foreign currency effects. There are three different forms of currencies, as demonstrated below:<\/p>\r\n<p>Assume that we have a sizable US-based organization, XYZ, i.e., the parent company with three subsidiaries in India, Kenya, and Mexico. At the financial year-end, the Indian company prepares its financial statements in Indian Rupees (INR), the Kenyan company in Kenyan Shillings (KES), and the Mexican company in Mexican Pesos (MXN).<\/p>\r\n<p>The subsidiaries use their <b>local currency<\/b> to prepare their financial statements, whereas the parent company uses <b>USD<\/b> to prepare its consolidated financial statements. USD, in this case, is called the <b>presentation currency<\/b>. If the Kenyan subsidiary carries out all its transactions in <b>KES<\/b>, then we say that KES is the <b>functional currency<\/b>. Assume that XYZ entirely controls the Mexican subsidiary. This means that it makes all operation decisions for the subsidiary, and consequently, all transactions are in USD. In this instance, USD is the <b>functional currency<\/b> for the Mexican subsidiary.<\/p>\r\n<p>To summarize the above explanations, we have:<\/p>\r\n<h2>1. Presentation (Reporting) Currency<\/h2>\r\n<p>Presentation currency refers to the currency that the <b>parent company<\/b> uses to prepare its financial statements. Mostly, a company\u2019s reporting currency is the currency of the country where the company is located.<\/p>\r\n<h2>2. Functional Currency<\/h2>\r\n<p>It is the currency of the primary economic environment in which an entity operates. A company&#8217;s management determines its functional currency. It is the currency in which an entity generates and expends cash. The functional currency can be the local currency or some other currency.<\/p>\r\n<h2>3. Local Currency<\/h2>\r\n<p>The national currency of the country in which a foreign firm operates is called the local currency. Typically, the local currency is the entity\u2019s functional currency. For accounting purposes, any currency other than the entity\u2019s functional currency is a foreign currency for that entity.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>The <i>most accurate<\/i> definition of the local currency is:<\/p>\r\n<p>A. Any currency other than the parent currency.<\/p>\r\n<p>B. The currency used by the parent company to prepare its financial statements.<\/p>\r\n<p>C. The currency of the country in which a company operates.<\/p>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is C<\/strong>.<\/p>\r\n<p>The local currency is the national currency of the country in which a foreign firm operates.<\/p>\r\n<p><b>A is incorrect<\/b>. For accounting purposes, any currency other than the entity\u2019s functional currency is a foreign currency for that entity.\u00a0<\/p>\r\n<p><b>B is incorrect<\/b>. The presentation currency is the currency that the parent company uses to prepare its financial statements.<\/p>\r\n<\/blockquote>\r\n<p>Reading 13: Multinational Operations<\/p>\r\n<p><em>LOS 13 (a) Compare and contrast presentation in (reporting) currency, functional currency, and local currency.<\/em><\/p>","protected":false},"excerpt":{"rendered":"<p>A multinational corporation is a firm that has business operations located in at least one country besides its home country. It may engage in transactions that are denominated in foreign currency or invest in foreign subsidiaries that keep their financial&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,312],"tags":[216,313,224,118],"class_list":["post-10329","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-financial-reporting-and-analysis-fra","tag-cfa-level-2","tag-financial-reporting-and-analysis-fra","tag-functional-currency-and-local-currency","tag-presentation-currency","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Functional vs Reporting Currency Explained<\/title>\n<meta name=\"description\" content=\"Learn the differences between 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