Global Bookkeeping: A Controller's Guide to Exchange Rates

Win the Game of Global Bookkeeping

guide to global exchange rates.

If your business operates internationally, you could be losing income if your books aren't consolidated to the right exchange rates for each country. Learn the ins and outs of staying abreast of the current numbers to keep things in the black.

How Exchange Rates Work

Units of currency aren’t equal from country to country. An exchange rate is used to determine the value of one nation’s currency compared to another’s.

 A price quote can be made either directly or indirectly using the domestic currency and the foreign currency.

Direct quotations give you the price of the foreign currency in terms of the domestic currency, and vice versa for indirect quotations. Exchange rates also have a base currency and a counter currency. The majority of exchange rates use the U.S. dollar as the base currency, but euro and Commonwealth currencies are exceptions. When an exchange rate uses two foreign currencies rather than one foreign and one domestic, the rate is called cross currency.

Examples

  • 1 USD = 0.90 EUR: Direct quotation of the euro in terms of U.S. dollars
    • Base currency: U.S. dollar
    • Counter currency: euro
  • 1 EUR = 1.11 USD: Indirect quotation of the euro in terms of U.S. dollars
    • Base currency: euro
    • Counter currency: U.S. dollar
  • 1 EUR = 9.83 EGP: Cross-currency rate for a country in which neither the euro nor the Egyptian pound is a domestic currency

    Most major countries use a floating exchange rate determined by market force. Some nations choose to “fix” their rates to a widely accepted currency, which means they'll move in tandem.

    Exchange rates are affected by multiple factors:

    • Supply and demand
    • Interest rates
    • Unemployment rates
    • Inflation
    • Gross domestic product
    • Numerous geopolitical factors

    Exchange Rate Risk

    Any company conducting international business is exposed to the inherent risks of dealing or reporting in multiple currencies, also called “currency risk” or “foreign exchange risk.”

    Transaction Exposure

    Transaction exposure occurs when companies import or export overseas on terms of credit. If the exchange rate changes before the settlement date, money may be lost and profits are impacted.

    Economic Exposure

    Domestic markets are impacted by internal fluctuations, but you become vulnerable to the economics of the foreign market as well when your company deals with foreign suppliers, goods or customers. Your company will spend more than you may have budgeted when the rates were steady if currencies lose value. 

    Financial Translation Exposure

    Financial reporting requirements differ by country so you might find yourself constantly checking exchange rates so you can report accurate numbers.

    How to Stay Current

    You may be feeling overwhelmed with all this ever-changing financial information, but you can stay on top of your game with minimal worry about accuracy. Choose accounting software that meets your needs to ensure that bookkeeping professionals on your team are up to date.

    Many features are available, so browse the following recommendations to create a list of your necessary components before you choose an application.

    • Connected Conversion Rates: Rather than relying on manual checks of conversion rates and the extra staff that this work might take, consider software that automatically converts currency at the current rate. This saves time and can save money in the long run.
    • Specifiable Rate Periods: In addition to keeping abreast of current conversion rates, some software has an ability to set a specified period for conversion rates rather than change the numbers as the rates change. This comes in handy for tracking contracts on credit. The agreed-upon rate can be set to last as long as the contract without resetting every time the conversion rate changes.
    • Accounting for Gains and Losses: You need to be able to account for gains and losses to keep current with the impact that changing currency rates can have on every business transaction. Real-time reporting of numbers and automatic updates help you stay accurate and provide a more realistic picture of your company’s finances. For added accuracy, look for features that can automatically update transactions in progress as well as completed transactions. 
    • Reconciliation of Multiple Currencies: You have to be aware of all the currencies your company deals in and be able to report in your currency and theirs for every foreign currency. Reconciliation is necessary to see the true financial health of your company.
    • Source Currency Requirements: Regulations for reporting can cause headaches even for professionals. The ability to identify source currency cuts down on errors in reporting and creates a clearer picture for internal and external reports.
    • Currency Locks: In addition to knowing the correct conversion rates and the source currency, the ability to lock a currency can avoid multiple problems. As your company grows, you may have organizational entities that deal only in one currency or stop dealing in multiple currencies. You don’t have to worry about ineligible currencies popping up in calculations when you can lock these accounts to a single currency. 
    • Report Generation: Controllers must report to multiple parties: board members, business owners, government agencies and others. Being able to customize reports to the currency you need helps you communicate necessary information in the monetary format you need for the occasion.

    Avoiding the downfalls of currency conversion isn’t as difficult as it may seem at first. By staying abreast of current exchange rates and reporting requirements, you can stay on your “A” game and devise a winning strategy for global bookkeeping.