What Is Functional Currency and How Is It Determined for Hong Kong Companies?

Functional currency (FC), under IAS 21, is the currency of the primary economic environment in which your business operates. A Hong Kong company does not automatically have HK$ as its functional currency.

Choosing the correct functional currency is critical and should be done carefully, as it does not change unless there are major shifts in business operations.

Primary factors

• Currency that mainly influences sales prices.
• Currency used for major costs such as labour, services, materials, and utilities.

Secondary factors

• Currency of financing, share capital, and loans.
• Currency in which operating cash flows are retained and bank accounts are held.

Group considerations

• Whether the entity is a holding company or subsidiary.
• Degree of autonomy from the parent company.
• Proportion of transactions with related entities.

Important considerations

• Once determined, functional currency should remain consistent.
• Auditors may challenge the choice, so documentation is essential.
• Osome helps clients assess and document their functional currency decision correctly from the start.