So far in this series, we’ve covered the basics of exchange and revaluation and revaluation and translation as it relates to accounts and controls. In this final post on currency accounting, we’ll provide a few additional pointers to help your currency accounting run smoothly.
Watch Your Rates
Everything depends on having good rates in your system. To be good, a rate needs to be updated frequently and accurately.
1. Update rates frequently
When you first start with multiple currencies, it’s often not a crucial part of your business. So, some businesses decide to update rates only monthly. If rates are stable, this isn’t much of an issue. If rates swing, it becomes a problem.
Let’s take an example. Say ACME only sets rates once a month. They send out weekly invoices to their U.K. Customer. At the end of the month, they revalue these invoices. For the entire month, they used a rate of 1 GBP = 1.5 USD. At month end, they revalue to a rate of 1 GBP = 1.75 USD.
| Invoice Date | Invoice Amount (GBP) |
Rate | Financial Statement Amount (USD) |
| August 1st | 10,000 | 1.5 | 15,000 |
| August 8th | 10,000 | 1.5 | 15,000 |
| August 15th | 10,000 | 1.5 | 15,000 |
| August 22nd | 10,000 | 1.5 | 15,000 |
| August 29th | 10,000 | 1.5 | 15,000 |
| Total for Month | 50,000 | 1.5 | 75,000 |
| Revaluation | 50,000 | 1.75 | 87,500 |
| Currency Gain | 12,500 |
At month end, none of these invoices have been paid. And the rate for the month changed dramatically. They revalue the amounts involved at month end and now the 50,000 of GBP invoices are worth 87,500 USD. So they need to book an entry of 12,500 USD to currency gain/loss. A significant number.
Now, let’s say ACME has a policy of changing rates as the month goes on (and to make things simple, we’ll assume the rate changes in a linear fashion). Here’s what those invoice postings may now look like:
| Invoice Date | Invoice Amount (GBP) |
Rate | Financial Statement Amount (USD) |
| August 1st | 10,000 | 1.5 | 15,000 |
| August 8th | 10,000 | 1.55 | 15,500 |
| August 15th | 10,000 | 1.60 | 16,000 |
| August 22nd | 10,000 | 1.65 | 16,500 |
| August 29th | 10,000 | 1.70 | 17,000 |
| Total for Month | 50,000 | 1.6 | 80,000 |
| Revaluation | 50,000 | 1.75 | 87,500 |
| Currency Gain | 7,500 |
Just by keeping rates up to date, the currency gain has changed dramatically.
2. Enter rates correctly
Almost all accounting systems allow you to specify default rates for your foreign currency transactions. They also let you override those rates on a transaction-by-transaction basis. But here’s the rub: some, but not all, accounting systems check the rates in your system to ensure they’re within an acceptable range. So, for example, if the system expects a rate of 1 GBP = 1.5 USD, the system will accept entries of 1.55 to 1.45 but will report an error if the user tries to override the rate with 1 GBP = 2 USD.
If you don’t have this type of control in your system, you can end up with major problems. You have a couple options:
1) Modify your system to check rates. This can be difficult.
2) Create exception reports to highlight cases where rates vary more than expected.
Start with the Foreign Currency
Accountants under month end pressure sometimes push to do their consolidated analysis before they’ve fully understood the local currency statement (in this case GBP). This doesn’t work. If you have legal entities operating in multiple currencies, you need to make sure the local currency is good before you do your revaluation.
I hope you’ve found this series of posts on currency accounting helpful. If you need help managing currency accounting challenges with your ERP system, feel free to contact us.