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IFRS and JGAPP  Functional Currency

List of news

1. Introduction
It has been a while since the last time we covered the topic related to IFRS. In this News, we will mention the treatment of foreign currency transactions, focusing on the term, functional currency from IAS 21, the effects of changes in foreign exchange rates.

2. What is functional currency?
IFRS defines a functional currency as “the currency of the primary economic environment in which the entity operates.” It is used to measure the company’s business performances and thus should be determined carefully based on several factors such as the currency influencing sales prices. However, entities applying Japanese GAPP (JGAPP) might not be familiar with the term, functional currency. In fact, there is no concept in JGAPP similar to that of functional currency as mentioned in IFRS. The concept of functional currency is one of the significant differences between IFRA and JGAPP.

3. Foreign currency transactions
In IFRS, a foreign currency transaction is defined as a transaction denominated or requires settlement in a currency other than the functional currency. In JGAPP, on the other hand, a foreign currency transaction is defined as a transaction denominated or requires settlement in currencies other than Japanese yen. 

4. Example (case adopting US dollar as functional currency)
For example, a parent company in the US has its subsidiaries in Japan and Korea. In cases where all of the entities in the consolidated group adopt US dollar as the functional currency, each entity does not realize foreign exchange gains/losses for transactions denominated in US dollar. In this case, a Japanese entity is to realize foreign exchange gains/losses for domestic transactions denominated in Japanese yen, which seems somewhat awkward because the Japanese entity realizes foreign exchange gains/losses for domestic transactions. In the recent globalization, however, some Japanese companies having overseas transactions are adopting US dollar or Euro as the functional currency.

It does not necessarily mean that a subsidiary’s functional currency should be aligned with the parent entity’s functional currency. The functional currency of each entity should be determined based on the actual business performances in each entity, apart from the presentation currency in the consolidated financial statements.

5. Conclusion
As mentioned above, one of the differences between JGAPP and IFRS can been seen in the treatment of foreign currency transactions. While JGAPP aims for reporting a company’s performance only in Japan, IFRS, from its global perspective, considers the selection of functional currency as one of the significant accounting decisions. 
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.