As Australian businesses continue to expand beyond borders in 2025, the concept of functional currency has become a pivotal consideration—not just for accountants, but for business leaders and investors alike. Functional currency isn’t just the currency you do business in; it’s the backbone of financial reporting and risk management for any entity operating internationally.
What Is Functional Currency and Why Does It Matter?
At its core, functional currency is the primary currency of the main economic environment in which a business operates. For many Australian companies, this is the Australian dollar (AUD), but for subsidiaries or operations based overseas, it could just as easily be the US dollar (USD), euro (EUR), or another major currency.
Determining the right functional currency is essential because it directly impacts:
- Financial reporting: All transactions, assets, and liabilities must be measured and reported in the functional currency.
- Tax compliance: A mismatch between tax reporting and functional currency can lead to errors or compliance headaches.
- Foreign exchange risk: The choice of functional currency influences exposure to currency fluctuations—and how those are reported in financial statements.
How 2025 Regulatory Updates Affect Functional Currency Choices
The Australian Accounting Standards Board (AASB) aligns with the IFRS (International Financial Reporting Standards), particularly IAS 21: The Effects of Changes in Foreign Exchange Rates. In 2025, the AASB has issued clarifications making it even more crucial for businesses to justify their choice of functional currency, especially for multinational groups or startups with overseas funding.
- Heightened scrutiny: Auditors and regulators are demanding clear, documented rationale for functional currency selection.
- Real-world example: An Australian fintech with a Singapore-based customer base may now need to demonstrate that SGD, not AUD, is its functional currency—affecting how it consolidates results and manages FX risk.
- Transitional impacts: If a company’s main operating environment shifts, a change in functional currency may be required. The 2025 guidance sets out a more structured process for this transition, including disclosure requirements and restatement of comparatives.
Functional Currency in Practice: Challenges and Opportunities
Choosing and managing functional currency isn’t always straightforward. Australian businesses face several practical challenges:
- Complex operations: Retailers sourcing goods in China but selling predominantly in Australia must weigh whether their economic environment is really AUD or RMB-driven.
- Startups and tech firms: Many early-stage companies raise capital in USD but operate locally, raising questions about which currency best reflects their financial reality.
- Exchange rate volatility: With the AUD experiencing swings against major currencies in early 2025, companies must carefully model the impact on reported profits and compliance obligations.
But getting it right opens doors to better financial clarity, easier investor relations, and reduced compliance risk. It also sets the foundation for robust hedging strategies and more transparent reporting to stakeholders.
Key Considerations for Australian Businesses in 2025
- Document your analysis: Keep a clear record of why a particular functional currency was chosen, including factors like revenue sources, expenses, and funding.
- Monitor for change: As your business evolves, revisit your functional currency assessment at least annually.
- Communicate with stakeholders: Investors, auditors, and regulators all have a stake in your decision. Transparency builds trust.
- Leverage technology: Modern ERP and accounting platforms can automate multi-currency reporting, reducing the risk of errors as requirements tighten in 2025.
