Reporting Currency Defined

Financial statements provide a company’s management team, investors, regulators, and other stakeholders with windows into the business for decision-making, deal-making, and oversight. For companies operating internationally, though, volatility in global currency markets can muddy the waters. In a multicurrency environment, a company’s reporting currency serves as a consistent standard that delivers financial clarity and supports informed analysis of the business’s health and performance.

What Is Reporting Currency?

Reporting currency (sometimes called presentation currency) is the currency in which a company prepares and presents its financial statements, such as the balance sheet, income statement, and cash flow statement. A company’s reporting currency is usually the same as its functional currency (also known as base currency), which is the primary currency in which the company conducts business—customarily the currency of its home market. Businesses operating internationally, however, often have subsidiaries that conduct transactions in different currencies. For reporting purposes, those companies must translate all that financial data from whatever the transaction currency was into their reporting currency.

Notably, while most businesses use their functional currency as the reporting currency, some may strategically choose a different reporting currency. For instance, a non-US company might report in US dollars to appeal to American investors.

Reporting Currency Explained

When foreign exchange (FX) rates fluctuate, accounting gets complicated. The process of converting finances and operations denominated in foreign currencies into the company’s reporting currency can result in gains or losses. For example, this can happen due to currency exchange rate changes between the time a transaction takes place in a foreign currency and the date of the parent’s financial statements, into which that transaction must be consolidated. Gains or losses also can occur in the gap between a transaction date and the date it’s paid. These and other variations in FX rates and timing can potentially distort various financial ratios and performance metrics, such as debt-to-equity ratios and profit margins, resulting in an untrue picture of the business’s performance.

Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards, specific gains and losses may receive different treatment, as translation-related or transaction-related.

• Translation-related: These gains and losses occur when a company rolls up its subsidiaries’ financial data into a consolidated report. They are recorded as “currency translation adjustments” as part of “other comprehensive income,” which is a component of equity on a balance sheet. In this situation, among others, these noncash line items are kept from directly affecting net income and, in turn, causing distortions in reported earnings. Companies can present “FX-neutral” results in such cases, giving various stakeholders greater insight into the company’s operational performance separately from the impact of currency fluctuations. However, it's important to note that not all foreign currency gains and losses receive this treatment.
• Transaction-related: This type of treatment mainly involves gains and losses resulting from timing differences between transaction and settlement dates. These are typically recorded directly in the income statement and do impact net income.

Notably, investors, analysts, and other stakeholders often look at both the original and FX-neutral sets of numbers to get a comprehensive view of a company’s performance.

Modern accounting software can aid in these and other multicurrency accounting steps by automatically applying currency exchange rates to transactions at different points in time, calculating adjustments, and translating all foreign subsidiaries’ financial statements into the reporting currency.

Companies operating internationally can find it challenging to present a unified view of their financial position and performance, especially in times of volatility in foreign exchange markets. A company’s reporting currency provides the standard unit of clear and consistent financial recordkeeping and analysis. By consistently translating the finances of diverse foreign operations into a single reporting currency, businesses can achieve the transparency necessary for sound decision-making and effective communications.