What Is a Reporting Currency?
A reporting currency is the currency in which an entity's financial statements or other financial documents are reported. Choosing one currency for reporting makes it easier to understand the financial documents across the board. Most often the currency used is the currency of the country in which the parent company is legally registered.
- The reporting currency is the currency in which a company will report its financial statements.
- A reporting currency must be one currency, which makes it easier to understand and follow financial documents.
- If a company does business in other currencies or has subsidiaries in other countries, the different currencies used must be converted to the reporting currency.
- Foreign currency translation can be done through the temporal or the current rate method.
- Under U.S. GAAP, for monetary items, the spot exchange rate should be used when converting currencies.
Understanding 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 company's home office or parent company where the financial statements are prepared is considered the reporting currency. Other satellite locations or subsidiaries that use different currencies, referred to as the local currency, in their day-to-day functioning must convert their financial statements into the reporting currency so that the statements can be consolidated. This is accomplished using either the temporal or current rate method of conversion and is often referred to as foreign currency translation.
To compile financial reports for multicurrency firms, 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 carrying out this conversion. This helps to maximize the transparency with which these financial reports are presented.
Example of a Reporting Currency
ExxonMobil is a large oil company that conducts business across the world. It is headquartered in the United States but has many subsidiaries spread out globally, such as Esso Australia and Mobil Producing Nigeria. Esso Australia would conduct its business in Aussie dollars and Mobil Producing Nigeria would conduct its business in Nigerian naira.
When ExxonMobil is preparing its financial statements, it will require that both Esso Australia and Mobil Producing Nigeria convert their financial figures into U.S. dollars, because it is the currency of the United States, where ExxonMobil is headquartered. The U.S. dollar is the reporting currency. If Esso Australia reported AUD 1 million, it would convert that AUD 1 million into USD, which is approximately $650,000. ExxonMobil would then use the $650,000 figure in its consolidated financial reporting.
Because the United States adheres to the generally accepted accounting principles (GAAP), ExxonMobil would have to follow GAAP guidelines on foreign currency translation, which would require the use of the spot exchange rate or an average rate for the period in question that is a close approximation. This would be for monetary items, whereas non-monetary items would be done at a historic exchange rate.