What is the difference between functional and presentation currency, and how do you determine functional currency?

Functional currency is the currency of the primary economic environment in which an entity operates — a matter of fact, not choice. IAS 21 sets primary indicators first: the currency that mainly influences sales prices (and the country whose competitive/regulatory forces determine them) and the currency that mainly drives labour, material, and other costs. If those are mixed, secondary indicators are weighed: the currency in which financing is raised and in which operating receipts are usually retained, and — for a subsidiary — its degree of autonomy versus being an extension of the parent. Presentation currency, by contrast, is simply the currency the group chooses to present its statements in (often the parent's), and is freely selectable. The distinction is critical because functional currency drives measurement (transactions booked in it; monetary items retranslated with gains/losses in P&L), whereas translating from functional to presentation currency (IAS 21 current-rate method) routes differences to OCI. Getting functional currency wrong mis-measures FX results throughout.