Key Takeaways
- A reporting currency simplifies financial statements by using one currency for all reports.
- Companies convert foreign currency transactions into their reporting currency for consistency.
- Exchange rates are used to convert local currencies to the reporting currency.
- ExxonMobil uses the U.S. dollar as its reporting currency, converting figures from global subsidiaries.
- GAAP guidelines dictate the methods for currency conversion in financial statements.
What Is a Reporting Currency?
Reporting currency is the primary currency in which a company presents its financial statements, allowing consistent and transparent reporting across operations.
Multinational firms rely on a single reporting currency to consolidate results, using methods like the temporal or current rate approach to convert foreign subsidiaries’ figures. For example, ExxonMobil reports in U.S. dollars to maintain clarity across global activities.
How Reporting Currency Works in Multinational Companies
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.
Reporting Currency in Action: ExxonMobil Case Study
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 $750,000. ExxonMobil would then use the $750,000 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.
The Bottom Line
Selecting a reporting currency simplifies the preparation and communication of financial statements, especially for multinational companies. International subsidiaries must convert their results into this currency using methods like the temporal or current rate approach to maintain consistency and transparency. These translations must also follow accounting standards such as GAAP.
