Foreign currency conversion involves expressing a monetary value in one currency in the units of a different currency. In business, currency conversions are often complicated and require special accounting practices. Accurate and uniform foreign currency conversion practices are important for companies, especially those that do a lot of business abroad. The specific rules governing foreign currency conversion are generally a matter of national law.
Foreign currency conversion, in its simplest sense, is any calculation that involves expressing a monetary value in one currency in the units of a different currency. Determining how many Japanese Yen (JPY) $100 US Dollars (USD) will buy is an example of a direct foreign currency conversion. In business, however, currency conversions are often much more complicated. When companies do business across borders, or purchase assets or supplies abroad, they often need to engage in special foreign currency translation accounting practices. Translations usually have to be done in several steps, in accordance with certain guidelines and national laws.
Currency conversion is an important part of the global trade landscape. How one country’s money is valued in another informs many different business decisions, from the timing of imports and exports to the locations of foreign offices. Exchange rates fluctuate constantly. Daily changes are usually minimal, but depending on how much money is at stake, even the smallest change can have a significant impact on your company’s bottom line. Accurate and uniform foreign currency conversion practices are therefore very important.
Most national governments – and some local governments – also require companies within their borders to make routine disclosures and public statements valuing their assets. Reporting rules generally apply to any company with a presence, no matter where the company is headquartered. Companies that do a lot of business abroad, as well as companies owned by foreign entities, generally must do a lot of foreign currency translation to submit financial statements that reflect all gains and losses in just one currency.
Companies must almost always report foreign financial transactions in the local currency. This usually involves converting foreign currency financial statements and accounts, as well as converting the overall corporate value. Disclosures must generally be made in the form of a consolidated financial statement, which is a single statement that lists all of the company’s transactions.
Foreign currency conversions in the corporate context often involve identifying three distinct currencies. Accountants who perform currency conversion usually begin by isolating the “books and records currency,” which is the currency the parent company uses to conduct its daily business. The second relevant currency is the “functional currency”, which is the main currency for transactions abroad. Finally, the “reporting currency” is the currency that must be used in the consolidated financial statements. The reporting currency is usually the same as the books and records currency or the functional currency, but not always.
The specific rules governing how foreign currency conversion is to be carried out are generally a matter of national law. Laws generally stipulate the calendar date that companies must use to determine the relevant exchange rate, for example, and set out specific rules to be followed in compiling consolidated financial statements. Rules for reporting currency fluctuations and deviations are also often included.
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