Defining the reporting currency
What is a reporting currency?
Presentation currency is the currency in which an entity’s financial statements or other financial documents are presented. Choosing a currency for reports makes it easier to understand financial documents at all levels.
Most often, the currency used is the currency of the country in which the parent company is legally registered.
Key points to remember
- The reporting currency is the currency in which a company will present its financial statements.
- A reporting currency should be a currency, which makes it easier to understand and track financial documents.
- If a company operates in other currencies or has subsidiaries in other countries, the different currencies used should be converted into the reporting currency.
- Currency conversion can be done by the temporal method or by the current rate method.
- Under US GAAP, for monetary items, the spot exchange rate should be used when converting currencies.
Understand a reporting currency
Many large companies have operations in different countries, which often requires doing business in a variety of currencies. When this is the case, the currency of the head office or parent company of the company where the financial statements are prepared is considered the presentation currency.
Other satellite or subsidiary sites that use different currencies, called local currencies, in their day-to-day operations must convert their financial statements to the presentation currency so that the statements can be consolidated. This is accomplished using the temporal or current rate conversion method and is often referred to as a foreign currency conversion.
To compile financial reports for multi-currency businesses, accountants must convert foreign currencies into a single reporting currency at the current exchange rate. To standardize this process, there are a variety of accounting regulations that prescribe a uniform methodology for performing this conversion. This maximizes the transparency with which these financial reports are presented.
Example of reporting currency
ExxonMobil is a large oil company with operations around the world. It is headquartered in the United States but has many subsidiaries around the world, such as Esso Australia and Mobil Producing Nigeria. Esso Australia would conduct its business in Australian dollars and Mobil Producing Nigeria would conduct its business in Nigerian naira.
When ExxonMobil prepares its financial statements, Esso Australia and Mobil Producing Nigeria will need to convert their financial figures to US dollars, as this is the currency of the United States, where ExxonMobil is headquartered. The US dollar is the reporting currency. If Esso Australia declared AUD 1 million, it would convert that AUD 1 million to USD, or roughly $ 750,000. ExxonMobil would then use the figure of $ 750,000 in its consolidated financial reports.
Since the United States adheres to generally accepted accounting principles (GAAP), ExxonMobil should follow GAAP guidelines on foreign currency translation, which would require the use of the spot exchange rate or an average rate for the conversion. period in question which is an approximation. This would be for monetary items, while non-monetary items would be made at a historic exchange rate.