Multi-Currency Accounting in PCS Global Accounting

Account Categories in Multi-Currency Accounting

PCS Global Accounting provides great flexibility in handling multiple currencies. Transactions can be entered in any currency and posted to accounts without regard to how the account is denominated. Gains and losses caused by currency fluctuations are automatically computed with accuracy limited only by the accuracy of the exchange rate data the user supplies. To provide this flexibility, three currency-related account categories are used — exposed accounts, historic accounts and reconcilable accounts. Asset accounts may be either exposed, historic or reconcilable. (PCS Global Accounting optionally allows cash transactions in any currency to post to reconcilable bank accounts, but these accounts may be restricted to allow drafts or deposits in only one currency, if so desired.) Liability accounts can be designated as exposed or historic. Equity, revenue and expense accounts are always historic.

Exposed accounts track transaction amounts in the currency of the transaction and evaluate these amounts using currently prevailing exchange rates. The denomination of posted amounts is preserved. Thus, amounts posted to an exposed account from a transaction denominated in a particular currency will cause the account’s balance to increase if that currency appreciates (or decrease if depreciation occurs). Note that, because the current value of a transaction amount is determined using the current exchange rate, it doesn’t matter when a transaction took place, only the denomination matters. On the other hand, tracking the balance in such accounts requires that transaction amounts for each currency be tracked separately for the entire history of the organization, including previously closed periods or years. The change an exposed account experiences because of exchange rate fluctuations is balanced by an opposite change in the balance of an account designated as the foreign exchange translation account.

Amounts posted to historic accounts are evaluated based on the exchange rates prevailing at the time of the transaction. Thus, the value, in terms of the base (i.e., the functional) currency, a transaction amount contributes to an historic account is constant — it does not vary with subsequent fluctuations in exchange rates. In other words, transaction amounts posted to historic accounts can be viewed as being converted to the base currency based on exchange rates prevailing at the time of the transaction. Balance sheets reporting balances in currencies other than the base currency will show balance decreases if the report currency appreciates and increases if the currency depreciates. Historic accounts do not contribute to foreign currency translation gains or losses.

In PCS Global Accounting, transaction amounts posted to reconcilable accounts (usually, bank accounts) are converted to the account currency at the time of transaction. For these accounts, foreign exchange translation gains or losses depend on the account currency. When account balances are reported, the balance is converted to the report currency using exchange rates prevailing at the time of the report. A reconcilable account denominated in a currency that appreciates relative to a second currency, will show a balance increase when its balance is reported in the second currency. When the report and account currency are the same, the balance will remain constant (assuming there has been no activity involving the account). The change a reconcilable account experiences as its exchange rate changes is balanced by an opposite change in an account designated as the foreign exchange translation account.

PCS Global Accounting allows the user to change the exposed/historic designation of asset and liability accounts at any time and financial reports can be generated in any currency.

Examples

The following examples illustrate how these account categories function and how they are used in PCS Global Accounting.

In these examples, the base currency is United States dollars (USD); the transaction currency is euros. At the time of the example transaction, the exchange rate for the Euro is 1.10 USD per Euro; at the time the value of the account balance is reported, the Euro’s exchange rate has increased to 1.20 USD per Euro.

Exposed Accounts

 A long term investment in Euro-denominated commercial paper is made. The purchase price is €1000. At the time of the investment this is equal to $1100.

In PCS Global Accounting, a cash transaction, denominated in euros, is entered for the payment of €1000 to the broker and an equal amount is debited to an exposed long-term investment account.

At transaction time, the purchase causes the balance of the long-term investment increase by €1000 or $1100 (= €1000 X 1.1/1.0).

Later, when a balance sheet is printed, the euro’s exchange rate is 1.2 USD per Euro. The change in the long term investment account from this investment is, if displayed in euros, €1000. (It will always be €1000.) But in USD, the change will be $1200 (= €1000 X 1.2/1.0). There has been a translation gain of $100 (or €83.33) caused by the appreciation of the Euro.

Historic Accounts

A fixed asset (say a piece of equipment) is purchased for €1000. The fixed asset account is designated as an historic account.

At the time the purchase transaction is entered, the fixed asset account increases by €1000 or $1100.

Later, when a balance sheet printed, the Euro has appreciated to 1.20 USD per Euro. The balance sheet, if printed to show balances in euros, will show the purchase’s contribution to the account balance to be €916.67 (= 1000 X 1.10/1.20). The value is that at the time of purchase, converted to current euros for the balance sheet report. If the balance sheet is printed in dollars, the contribution will be $1100 (the same as at the time of purchase).

For historic accounts, there is no translation gain or loss, since contributions to account balances for transaction amounts are evaluated once-and-for-all at the time of transaction.

Reconcilable Accounts

A cash receipt of €1000 is deposited in a reconcilable account. The deposit increases the account balance by €1000 or $1100. The account is a European bank account and is denominated in euros.

Later, when a balance sheet is printed, the Euro has appreciated to 1.20 USD per Euro. If the balance sheet is denominated in euros, the contribution to the balance of this receipt will be €1000, but if the balance sheet is printed in dollars, the contribution will be $1200. There has been a translation gain of $100 since the deposit was made.

Now assume the bank is a US bank (denominated in dollars). In this case the deposit was converted from €1000 to $1100 at the time of the deposit. When, later, a balance sheet denominated in euros is printed, the contribution of this deposit will be €916.67 (= 1000 X 1.10/1.20); if the report is denominated in dollars the amount remains $1100. In this case the translation amount is zero.

Note that, as this example shows, the account balance and translation gains and losses are dependent on the currency of the bank account.