The global cross-border e-commerce market in 2024 was an estimated $1.14 trillion, and it’s a tiny fraction of the global market value. Even small businesses have access to sizable global sales opportunities that are making them hold incredible amounts of currency. Small businesses are usually exporters and small businesses make up the vast majority of exporters and are continuing to expand their global reach through export promotion programs.
Look, it’s simple: when you are exporting, you are in a whole new situation. Companies that needed to worry about making local sales only have to deal with getting payments in euros, invoices in Canadian dollars, and working with suppliers who want money in local currency. It fundamentally changes how you account for all things money in your business.
What makes it difficult is that all of these changes affect everything. Your accounts receivable, your accounts payable, your compliance issues, your entire financial system really requires a wholesale overhauling. And the truth is, the need for perfection just increased now that online marketplaces and virtual partnerships are the norm pretty much everywhere.
Accounting advisors, bookkeepers, and accountants assisting such burgeoning businesses seriously need to grasp the nitty-gritty and the convoluted rules involved with the management of more than one currency. It isn’t merely a nice-to-have any more.
What Multi-Currency Bookkeeping is
Let’s get back to basics. Multi-currency accounting involves having accounting records capable of dealing with journal entries and other transactions in more than one currency and still provide proper reports within your main company currency. Sounds straightforward, there are however some basic principles you need to understand.
Transaction currency is just what you would expect it to be. It’s the money involved in the initial business transaction. So, when your American firm sells product to a German client and charges them euros, that amount of euros is your transaction currency. That matters because it determines where and how that transaction initially enters your accounting system and impacts everything thereafter.
Then there is the concept of the functional currency, or sometimes you’ll hear the base currency. It’s simply the primary currency your business operates within — for many small businesses within the United States, it’s the United States dollar, regardless of what other currencies you receive from customers or make payments to vendors for. You can consider it your financial “home base,” where everything gets reported for taxation and financial reports.
Alright, we’re really getting into the nitty-gritty now. You’ve got two processes at work here: remeasurement and translation. Remeasurement is just swapping transactions that were executed through foreign currencies back into your core currency and you’ll be doing that more often than not on a day-to-day basis. Translation is a bit different. It comes into the picture when you’ve got full foreign operations with their accounts held in more than one foreign currency and you want to aggregate it all into your parent company reports.
Your normal accounting records get more involved. You’ve got accounts receivable and payable that now need both the original foreign amounts and what they’re worth in dollars. You’ve probably got bank accounts that have more than one kind of currency. Customer and vendor files need currency allocations. You’ve got a broader chart of accounts with foreign exchange gain and loss accounts. It’s a big puzzle, but it can be managed once you understand the puzzle pieces.
Important Accounting and Tax Rules You Should Know
The regulations for this kind of thing are really straightforward, although it seems like a lot initially. The Financial Accounting Standards Board’s ASC Topic 830 is the bible for how you handle foreign currency items in financial statements that tells you precisely what you need to do with these transactions. It introduces the concept of the “functional currency approach” and lays it out for you with respect to measuring and reporting foreign currency effects.
So, like, when it comes to taxes, the IRS has its own rules that don’t always match up with accounting standards. Here’s a thing that confuses a lot of folks: according to U.S. tax law, only the U.S. dollar is considered “money”. Everything else is seen as “property”. Basically, this means that almost every foreign currency deal can create a taxable gain or loss, even if you haven’t actually got any cash in hand.
So the IRS has this information, primarily in Publication 525 and a few other places, on how you ought to handle foreign currency gains and losses. You’ve got realized losses and gains, which are the types that become relevant when you actually complete a foreign currency transaction, such as when that German client actually pays their bill for euros. Typically, these appear in your taxable income the year they arise. Then you’ve got unrealized gains and losses from revaluating your foreign currency accounts at the end of a period, and just what you do get taxed on really depends on your own individual situation.
What you especially need to grasp is that the differences in timing between taxation and financial reporting can be material. For your ASC 830 financial statements, the unrealized foreign exchange gains and losses just bypass your current period earnings. But the IRS normally employs a realization method, although Section 988 dealings can make for different treatment based upon your method of accounting and some elections you could make.
Good bookkeeping is truly essential here. The IRS will want detailed records to back up your foreign currency calculations — like what exchange rates you used, where you obtained the rates, and what you used to calculate each type of transaction. They will tolerate any posted exchange rate if you’ve been uniform in your usage, but you’ll need to be able to show that your method make sense and you’ve been consistent in usage.
Practical Bookkeeping Practices
It all comes together when you nail the day-to-day stuff. You require some good processes happening for you to track your foreign currency positions and for them to stay current. Let me show you just what I’m referring to.
Recording a transaction begins with writing down all foreign currency transactions in both currencies — the initial foreign amount and what it’s equivalent to in your main currency. You calculate the main currency amount through the exchange rate occurring on the day you perform the transaction (that’s the “spot rate”). Sounds straightforward, but you actually do need firm steps for choosing what exchange rate to opt for. You going with your bank’s rate? Or perhaps some publicly published service? You gotta be uniform here.
You need to configure your account structure to accommodate for the dual tracking herein. Utilization of foreign currency sub-ledgers or special account configurations enables you to maintain records of the original foreign amounts and the dollar equivalent amounts. This is very critical for proper aging reports and payment matching. So upon the German customer making their payment six weeks afterwards, the payment must be matched with the original euro amount and not the dollar equivalent amount only.
Okay, one of the hardest parts — periodic revaluation. End of the reporting period, you’ve got to revalue your foreign currency monetary assets and liabilities at the prevailing exchange rates. That’s what puts those unrealized gains and losses on your income statement. The KPMG foreign currency handbook provides you with some very detailed recommendations on just the right way to carry out these revaluation processes.
Finding exchange rates takes a little thinking ahead. Most firms have policies indicating exactly where you obtain your rates: Federal Reserve released rates, bank rates, commercial services, or whatever your situation may dictate. The key is that your source should provide all the currencies you handle and you should use it consistently across the board.
The more currencies there are, the more bank reconciliation will take more effort, because you go through a separate reconciliation process for every one. Your bank statement is in its original currency, but you will translate it to your functional base for general journal postings. Month-end bank balances will be re-measured at period-end rates and so foreign exchange differences arise and they will not be on the same amount that the bank statements show.
Documentation requirements are more than normal bookkeeping. Foreign exchange transactions need the exchange rate used, where you obtained the exchange rate, and what you’ve done to arrive at the amount for the functional currency. This helps with your internal controls and with any future audits or tax examination you could receive.
The good news is the accounting software these days is quite advanced where multicurrencies are concerned, but there are a few core differences amongst the platforms you should bear in mind.
QuickBooks Online provides multicurrency features that let you link specific currencies with customers and vendors, foreign bank accounts, and carry out multicurrency transactions. Automatically, exchange rates are refreshed, and you can avail yourself of the advantage of manual entry where you need specific exchange rates. Foreign amounts are converted into your home currency by utilizing the use of the transaction-date rates, and revaluation tools for amounts outstanding are also offered.
Xero processes over 160 currencies and updates exchange rates every hour and can output invoices, quotes, and purchase orders into foreign currencies. Foreign dealings are automatically converted into your base currency and foreign exchange gains and losses are reported.
NetSuite is really an enterprise system and offers more sophisticated features. You can handle multiple subsidiaries with different functional currencies, advanced foreign exchange management, and complete multicurrency reporting. That does become significant if you’ve very complex organizational structures where different parts of your enterprise carry out business in different currencies.
And you know what actually catches many businesses off guard? Payment processing integration. You can find that your multicurrency functionalities within your accounting program aren’t quite compatible with your payment processors. That creates some bothersome reconciliation situations where you end up having to perform unnecessary manual labor just to get your foreign currencies payments reconciled properly.
Hey, there are some universal items worth watching for. Many platforms will not allow you to alter customer or vendor currency settings after you’ve already entered your transactions. Also, they may not retain historical exchange rates for very long. In addition, bank integration for automatically importing transactions may not get along with foreign currencies. Furthermore, some platforms reserve their best multicurrency options for the higher cost subscription tiers.
When you’re deciding on software, think where your company is going, not where it is now. Those basic multicurrency capabilities might work for the startup, but they can deter you as your international company expands and deepens complexity.
Common Errors and Problems of Noncompliance
There are several recurring problems that businesses run into with multicurrency accounting. Understanding these upfront can save you significant headaches later.
Inconsistent application of exchange rates is most likely the most prevalent error. Companies could apply varying rate sources for the same type of transaction, use rates for varying dates, or inconsistently apply their predetermined policies. You must consistently apply the exchange rate methods you adopt, and inconsistent applications can lead to examination and adjustment. Regular checks and clear rules help avoid such pitfalls.
Failing to revalue properly the outstanding amounts causes trouble on more than one front. ASC 830 mandates revaluation of monetary assets and liabilities denominated in foreign currencies at each reporting date. Overnight, you will improperly state your financial position and stand the risk of overstating or underreporting taxable income. The unrealized gains and losses thus caused have distinguishing tax treatment that you must comprehend and apply correctly.
Mistakes in tax reporting for foreign currency gains and losses can be especially expensive. IRS treatment is determined by factors — the character of the underlying deal, your method of accounting, available elections. it is quite common for businesses not to make the proper distinction between Section 988 deals (ordinary income method of accounting) and foreign currency capital deals. Documentation weaknesses carry significant threats within IRS audit or external audits. IRS demands records for foreign dollar computations, such as proof of exchange rates and computation methodologies employed. You could receive changes based upon IRS-calculated rates and methodologies unless you can show your method is reasonable. Bank reconciliation issues in multi-currency setups can often mask mistakes that just pile up over time. You’ve got to reconcile foreign currency bank accounts in both the original currency and your main currency, while also dealing with those exchange rate differences. People often miss these differences, which leads to bigger and bigger discrepancies. Configuration errors with the software lead to systematic problems for all foreign currency dealings. Incorrect customer or vendor currencies, malfunctioning automatic exchange rate updates, or flawed revaluation processes can lay dormant for months. Configuration errors rarely become evident until months after they’ve affected numerous dealings and report intervals.
Conclusion and Call to Action
Expansion into international markets through small businesses has brought multicurrency accounting into focus as a necessity and not an advanced feature. Handling more than one currency and maintaining conformance with U.S. standards of accounting and taxation calls for systematic processes, relevant tools, and robust internal controls. For small businesses and their advisors who want an easier method of correctly recording multi-currency accounts, try the simplification of records and compliance through MagicBooks.
