Definition
Functional currency is the currency of the main economic environment in which a business operates, and the currency its books are kept in.
What is functional currency in a group?
Transactions in any other currency are converted into the functional currency when they’re recorded. In a group, each company has its own: a UAE subsidiary typically uses AED and an Indian one INR. The group then reports in a presentation currency, translating each company’s figures at the appropriate rates. Under IFRS, IAS 21 sets out how to determine it, based on the currency that mainly drives prices and costs.
Example: a company buys from China in US dollars and sells locally in SAR; its functional currency is SAR, and each USD invoice is converted at the rate on its date.
It’s often called base currency. Rate moves between recording and settlement create an FX gain or loss.