Multi-Currency Accounting

The vast majority of businesses need to be able to transact, account and report in multiple currencies. As the barriers to international trade disappear and domestic competition grows fiercer, many companies are entering the expanding global market for products and services. This presents several potential multi-currency accounting problems for accountants and accounting systems users, such as:

  • How to process transactions in more than one currency.
  • How to maintain multiple currency rates within one accounting system.
  • Dealing with exchange rate differences between invoices and payments.
  • Issuing invoices in multiple currencies.
  • Managing bank accounts in several currencies.
  • Making payments in foreign currencies.
  • Reporting in local and alternative base currencies.
  • Revaluation of balances at a revised currency value.
  • Calculating realised and unrealised gains or losses.
  • Multi-currency company consolidation.
  • Adoption of FRS 102 “Presentation Currency”.
  • Ability to adapt to changing multi-currency accounting standards.

In addition, a multi-national company may need to factor in different requirements and multi-currency accounting principles for each of their entities in various countries.

Multi-currency accounting principals

Most countries have a code of standard accounting practices to deal with foreign currency accounting. In the UK and Canada it’s SSAP 20, and for the U.S. it’s FASB 52. Generally speaking, these country-specific documents are very similar. For example, SSAP 20 states:

“During an accounting period, a company may enter into transactions which are denominated in a foreign currency. The result of each transaction should normally be translated into the company’s local currency using the exchange rate in operation on the date on which the transaction occurred”.

This effectively means that foreign currencies should be treated in the same way as non-monetary assets, i.e. accounted for in the local currency.

The summarised main points of the SSAP 20 method are:

  • There is always one special reference currency. This is typically the company’s local currency.
  • All accounts are kept in the reference currency.
  • Tallies in non-reference currencies are only informational. They don’t take part in balancing.
  • Fluctuations in the relative values of non-reference currencies are reflected immediately in their corresponding asset accounts (and also in a currency gain/loss account).