Reporting currency definition
/What is a Reporting Currency?
A reporting currency is the currency in which a parent organization prepares its financial statements. The reporting currency is usually the currency used in an organization's home country. In order to issue financial statements in its reporting currency, a multi-national firm must first convert the reporting of its subsidiaries in other countries to the reporting currency.
The issue of which currency to use as an entity’s reporting currency is of little concern to smaller businesses, which likely transact the vast majority of their transactions in a single currency. It is more of a concern for larger multi-national businesses, and especially those that have changed the country in which they are incorporated.
Characteristics of a Reporting Currency
The key characteristics of a reporting currency are as follows:
Currency of financial reporting. A reporting currency is the currency used to prepare and present financial statements. It aligns with the organization's reporting obligations based on jurisdictional requirements.
Reflects functional currency. A reporting currency often aligns with the functional currency, which is the currency of the primary economic environment in which the entity operates.
Standardization across entities. For multinational organizations, a reporting currency provides a common currency for consolidating financial data from subsidiaries operating in different currencies. Subsidiary financials may be translated into the reporting currency using appropriate exchange rates.
Affected by exchange rate fluctuations. Exchange rate fluctuations between the reporting currency and the functional currencies of subsidiaries can influence reported financial results.
Consistency in application. Once a reporting currency is selected, it should remain consistent across reporting periods unless there is a significant change in the organization’s operational structure or environment.
Governed by accounting standards. The selection and use of a reporting currency must comply with relevant accounting frameworks, such as GAAP or IFRS.
Example of a Reporting Currency
The Alaskan Barrel Company (ABC) has subsidiaries located in Japan and France. Its home office is located in the United States. In order to produce consolidated financial statements, ABC must first convert the financials of its Japanese subsidiary from yen to dollars, and convert the financials of its French subsidiary from euros to dollars. In this case, U.S. dollars are the reporting currency of ABC.