What is presentation currency and functional currency for a reporting entity?

Functional Currency is the currency in which the organisation operates and conducts all its core business transaction. Financial transactions of the organisation that are not conducted  in the functional currency is treated as foreign currency for that organisation. The principal parameters that determine the effects of functional currency are the source of fund generation, the cost and expenses of the organisation, the price at which the goods or services are sold/provided etc.

Presentation Currency is the currency in which the financial figures of the organisation are represented in the presentation and is mainly related to the target audience or targeted business area and it’s done for the ease of understanding of the target audience.

As a Normal Good Practice it is always advisable to retain the functional currency as the presentation currency unless it is done for a specific purpose as mentioned above. 

International Accounting Standard 21 (IAS 21) defines functional currency as “the currency of the primary economic environment in which the entity operates”.

The same Standard defines presentation currency as “the currency in which the financial statements are presented”.

'Presentation Currency' is the currency in which the financial statements viz Balance Sheet and Profit & Loss Account of an entity is reported and 'Functional Currency' is the currency in which the financial transactions of the entity are actually carried out. In 'multinational company', the company is having offices/units/branches in various countries and the 'functional currency' in each country may be different such as dollar, euro, pound, dinar, dhirram, rial and INR, etc whereas the presentation currency in which the financial statements as reported the holding company may be, say, dollar.