With more igaming businesses receiving bets from across multiple jurisdictions, Claudia Vella Schembri and Jonathan Dingli provide some advice on how management should go about determining the functional currency of an entity.
In today’s rapidly evolving business environment it has become a very common practice for entities to expand their customer base to overseas markets or to have their operations extended overseas to countries where the costs of, or the incentives for doing, business are more enticing. This is no different for gaming entities, which as part of the nature of their business, they operate across multiple jurisdictions and as a result of B2C (business to customer) transactions, they receive bets in various currencies. This may lead to uncertainties when determining the functional currency of an entity and poses a challenge for management in their assessment of the appropriateness of functional currencies. International Financial Reporting Standards (IFRS) provide guidance to determine the functional currency of an entity, under IAS 21 The Effects of Changes in Foreign Exchange Rates. The standard also prescribes how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. For the purpose of this article, we’ll be focusing specifically on determining the functional currency for entities, determining the functional currency of a foreign operation, and how to deal with a possible change in the said functional currency. Definition and determination of the functional currency The functional currency is the currency of the primary economic environment in which the entity operates. That is, the environment within which the entity normally conducts business and where it generates income and spends cash. All other transactions in currencies other than the functional currency, are treated as transactions in foreign currencies. To determine the functional currency an entity needs to consider various factors, which IAS 21 splits into 2 categories, that is the primary and the secondary factors. The primary factors that an entity needs to consider are the following:
- The currency that mainly influences the sales prices for the goods and services, which will often be the currency in which sales prices for its goods and services are denominated and settled.
- The currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services.
- The currency that mainly influences labour, material and other costs of providing goods or services, which normally is the currency in which such costs are denominated and settled.
- The currency in which funds from financing activities are generated.
- The currency in which receipts from operating activities are usually retained.
- Autonomy – whether the operation is essentially an extension of the reporting entity.
- Proportion of transactions – whether the foreign operation’s transactions with the reporting entity constitute a high or low proportion of the operation’s activities.
- Proportion of cash flows – whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it.
- Debt service – whether a foreign operation’s cashflow can service its debt obligations without funds being made available by the reporting entity.