Trading in more than one currency changes where gains and losses land in your statements.
Operating across borders means recording transactions in several currencies and still reporting coherently. Functional currency, remeasurement and translation rules decide how a moving exchange rate shows up in your numbers.
Functional against presentation currency
Functional currency is the main economic environment a business operates in. Presentation currency is what external reports use, often the parent company's.
Getting the functional currency right matters, because it decides whether FX gains and losses run through income or through equity.
Remeasuring what moves
Monetary assets and liabilities held in a foreign currency are remeasured at current rates, and the difference usually hits the income statement.
Non-monetary items carried at historical cost generally stay put, unless they are impaired or revalued under a specific standard.
- Identify which balance sheet items are monetary
- Apply period-end rates to those balances
- Record FX gains and losses in the right period
- Write down the rate source and the method
Translating for consolidation
A foreign subsidiary translates assets and liabilities at closing rates and equity at historical rates. Under most frameworks the translation adjustment accumulates in other comprehensive income.
Intercompany balances between entities with different functional currencies need eliminating, and the FX policy on both sides has to agree.
Systems and the close
Your system should store the transaction currency, the functional currency amount and the rate used. Converting by hand at month end is where errors come from.
Treasury and accounting should settle on one rate source, whether spot, monthly average or budget, and use it consistently.
Written by the team at Ambivo, a business platform that keeps CRM, accounting and ERP on one customer record. This article is general guidance on the topic rather than a description of Ambivo features.