Multi-currency accounting: here’s what to know.
Running a global organization means managing various currencies around the clock. Multi-currency accounting makes it easier to manage that complexity. Because there needn’t be a tradeoff between accuracy and agility.
Key Multi-Currency Accounting Terms
What are the key terms in multi-currency accounting?
Company currency: Also known as functional currency, this is the currency of the primary environment in which the entity generates and expends cash. Determining the functional currency tends to be incredibly straightforward, but there are circumstances that require more consideration. Under Accounting Standards Committee (ASC) 830 in the U.S., for instance, a currency in a highly inflationary environment is not considered stable enough to serve as a functional currency.
Foreign currency: This refers to any currency other than the company currency.
- Transaction currency: Also known as ledger currency, this is simply the currency of a submitted transaction. It can be the same or different from the functional (company) currency.
- Reporting currency: Global companies are required to report at the local level, with the local entity typically taking the lead on such reports. The reporting currency—meaning the currency in which the financial statements are prepared—is often the currency of the country where the local entity is located. But it doesn’t have to be. For example, a New Zealand company that is registered in Australia and has significant investors in the United States might prepare financial statements using the New Zealand dollar, the Australian dollar (to satisfy requirements by the Australian Securities & Investments Commission), and the U.S. dollar (for investors).
Translation: This is the process of converting transaction details and financial reports from functional currency to the reporting currency. While some companies tackle this through manual calculations, accounting software can automate translation.
- Exchange rate: The rate at which one currency will be exchanged for another currency at a particular point in time. When multi-currency accounting is powered by intelligent automation, each translation is automatically translated into the company currency based on the exchange rate in effect on the date of transaction.
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Multi-Currency Accounting Best Practices
What are multi-currency accounting best practices?
Financial regulations may change, your organization’s global footprint or operations may evolve, but these best practices are here to stay.
Unify the enterprise on a single solution. Disparate applications means more friction, frustration, and interoperability issues that could lead to working with inaccurate or out-of-date data. To ensure consistency across the global accounting function, opt for one solution that supports multi-currency accounting and reporting.
Configure the system’s accounting rules. You should be able to easily modify an accounting system’s rules and workflows so that they’re tailored to your organization—not have to contort your team to fit a one-size-fits-some solution. Dramatically simplify and streamline multi-currency accounting by opting for accounting software that enables your accounting team to easily maintain and modify the rules as needed.
Embrace automation. AI and ML are reshaping the finance function, and accounting is no different. By letting intelligent automation manage routine but dynamic tasks, your finance team can devote more time to high-impact activities and accelerate the close.
Preserve data lineage. For transparency and compliance, an audit trail is absolutely essential. But an accounting software that preserves both the company currency and transaction currency for a transaction’s entire lifecycle can also help deliver richer insights, greater efficiency, and more complete peace of mind.