Accounting technology / Glossary / Multi-currency accounting

What is multi-currency accounting?

Definition

Multi-currency accounting is recording transactions in more than one currency while keeping the books in a single base or functional currency. The software stores each invoice, bill and bank balance in its own currency, converts it at an exchange rate, and records the gains and losses that arise as rates move before the transaction is settled.

Also calledforeign currency accountingmulticurrency

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Base currency: Entity's functional currency
On settlement: Realised gain or loss
At period end: Open balances revalued

How multi-currency accounting works

Each entity has a functional currency, which IAS 21 defines as the currency of the primary economic environment in which it operates. A foreign-currency invoice is recorded at the rate on the transaction date. When it is paid at a different rate, the difference is a realised exchange gain or loss. At each period end, open balances in foreign currency, such as receivables, payables and bank accounts, are restated at the closing rate, producing unrealised gains or losses; this is FX revaluation. Groups with subsidiaries in other currencies also translate each subsidiary's accounts into the group's presentation currency for consolidation, with the translation difference taken to equity. Software pulls daily rates from a feed, holds foreign-currency bank accounts and supplier and customer balances, and posts the revaluation automatically.

Common questions

What is the difference between realised and unrealised exchange gains?+

A realised gain or loss arises when a foreign-currency transaction is settled at a different rate from the one recorded. An unrealised gain or loss comes from restating balances that are still open at the period-end rate.

What is a functional currency?+

The currency of the main economic environment where an entity earns and spends cash. Its books are kept in that currency, which can differ from the country where it is registered or the group's reporting currency.

Which exchange rate should be used?+

The rate on the transaction date for each transaction, often a daily rate from a published feed, and the closing rate at the period end for revaluing open monetary balances. An average rate is acceptable where rates do not move much.