Multi-Currency Accounting Within a Group

A group with companies in several countries, customers who pay in euros, suppliers in dollars and a Swiss parent company that thinks in francs has to bring order to a technical yet everyday problem: how to keep the books when more than one currency is involved. Multi-currency accounting is not merely a matter of conversion: it touches on the choice of the reference currency, the treatment of exchange differences and the consolidation of the group.

Functional currency and presentation currency

The first concept is the functional currency: that of the primary economic environment in which a company operates, i.e. where it generates and spends most of its cash. A subsidiary that sells and pays for almost everything in euros has the euro as its functional currency, even if it belongs to a Swiss group.

In Switzerland, the Code of Obligations allows the accounts to be kept and presented in a foreign currency relevant to the business, in addition to francs. If a foreign currency is chosen, the figures must nonetheless also be stated in CHF, with the conversion rates used disclosed and, where necessary, commented on. The presentation currency of the group’s consolidated financial statements is typically the franc for a Swiss parent company.

Recording transactions in foreign currency

Individual foreign-currency transactions are recorded by converting them into the accounting currency at the spot rate on the transaction date. So far it is straightforward. The issue arises at closing, when foreign-currency items remain open — receivables, payables, bank accounts:

Monetary items (cash, foreign-currency receivables and payables) are remeasured at the closing rate.
The difference from the value initially recorded is an exchange difference, to be recognised in the income statement.

This gives rise to foreign-exchange gains and losses that have nothing to do with operating activity, but which must be recognised correctly.

Realised and unrealised differences

It is worth distinguishing:

Realised differences: these arise when the item is actually settled (the receivable is collected, the payable is paid) at an exchange rate different from the one recorded.
Unrealised differences: these arise solely from the year-end remeasurement of items still open.

The prudence principle of the CO leads to careful recognition of losses in particular; in Swiss practice, for consistency, both gains and losses from the remeasurement of monetary items are as a rule recognised, and many groups use an annual average rate set by the authorities as a reference to simplify matters.

Consolidating the group

When the consolidated financial statements are drawn up, the accounts of companies with a different functional currency must be translated into the group’s presentation currency. The most common method provides for:

Assets and liabilities translated at the closing rate.
Revenues and expenses translated at an average rate for the period.
Equity at historical rates.

The mismatch between these rates generates a translation difference that does not pass through the income statement but accumulates in a reserve within the group’s equity. It is a technical adjustment that reflects the fact of measuring in a single currency realities that live in different currencies.

Common mistakes

Confusing a company’s functional currency with the group’s presentation currency.
Failing to remeasure monetary items at year-end, leaving latent exchange differences.
Treating consolidation translation differences as if they were operating expenses or income.
Using inconsistent or undocumented exchange rates between recording and closing.

In summary

The functional currency depends on the economic environment in which the company operates.
In Switzerland the accounts may be kept in a foreign currency, with the figures nonetheless stated in CHF.
Monetary items are remeasured at the closing rate, with differences going to the income statement.
On consolidation, translation differences go to an equity reserve.

How we help you

For groups we set up multi-currency accounting, the management of exchange differences and consolidation in the presentation currency, in compliance with the Code of Obligations. We bring order to your group’s accounts.