Functional currency

IAS 21 requires every entity in a group to have one, determined on evidence rather than chosen: the currency that mainly influences its selling prices, the currency of the country whose competitive forces and regulations determine those prices, and the currency in which labour, material and other operating costs are settled.

It is not the same thing as the presentation currency. A euro reporting group can contain a UK subsidiary whose functional currency is sterling and a financing vehicle whose functional currency is the euro, and it still presents one set of euro accounts.

The determination decides where currency movements land. A transaction in a currency other than the entity's own functional currency creates a gain or loss that runs through profit or loss as it arises. Translating a subsidiary from its functional currency into the group's presentation currency is a separate exercise, and the gain or loss on retranslating its net assets goes to other comprehensive income instead.

That split is why an interviewer asking about currency is usually asking about the difference between a real economic exposure and a presentational one. Getting functional currency right is what makes the two separable in the first place. US GAAP under ASC 830 draws the same distinction, so this is one of the areas where the two frameworks broadly agree.