How currency conversion runs, step by step

Currency conversion runs from rate setting through to reporting. Treasury picks the rate source and loads rates. Accounting staff record foreign currency transactions and settle them. At period end, general ledger accountants revalue open balances, consolidation translates subsidiary results, and the controller reconciles everything back to the ledger.

The steps in order

1. Set the rate policy. The treasury lead decides which rate source counts as official and which rate type applies to each purpose. Spot rates usually cover individual transactions. Period-end rates cover revaluation. Average rates often cover income statement translation. The controller signs off on this policy because auditors will test against it.

1. Load exchange rates into the system. A treasury analyst, or an automated feed that the analyst owns, brings published rates into the rate table on a fixed schedule. Where the feed fails, someone keys rates by hand, and that manual path deserves attention.

1. Check the rate table. A general ledger accountant compares loaded figures with the source. Inverted pairs and missing currencies are the usual faults. Errors caught here are cheap. Errors caught after posting are not.

1. Record transactions in their original currency. Payables clerks enter supplier invoices and receivables staff enter customer billings in the currency on the document. The system converts each one to the functional currency at the rate in force on the transaction date. Revenue from foreign customers is booked this way too, including accruals for amounts earned but not yet billed.

1. Arrange foreign currency for outgoing payments. When a foreign invoice falls due, the payments team builds the disbursement schedule and flags which items need currency bought. Treasury then executes the trade with the bank or through a platform and passes back the deal confirmation. Payments not yet due sit in the queue until their date arrives.

1. Release and settle the payment. An approver certifies the payment run once quality checks pass. On settlement, the difference between the booking rate and the actual deal rate posts as a realised gain or loss. Incoming customer receipts follow the same logic when cash applications staff match them to open invoices.

1. Revalue open balances at period end. A general ledger accountant runs revaluation on foreign currency receivables, payables, bank accounts and intercompany balances. Unrealised gains and losses post automatically, and most systems reverse them at the start of the next period.

1. Translate foreign subsidiary results. The consolidation team converts each subsidiary's ledger into the group reporting currency. Balance sheet lines and income statement lines use different rates, and the gap lands in a translation reserve within equity.

1. Reconcile and trace to the ledger. The controller or a senior accountant confirms that foreign currency reports agree to general ledger account balances. Realised and unrealised accounts get reviewed for anything that looks out of proportion to the period's activity.

1. Report exposure and results. The finance team prepares the foreign currency reports for management, showing gains, losses and open positions by currency. Treasury reads these to decide on hedging and to adjust the rate policy if business patterns have shifted.

Where the handoffs tend to slip

The gap between steps 5 and 6 causes the most trouble. Treasury books the deal at one rate. The payments system may assume another. If the deal confirmation reaches accounting late, the realised gain or loss is calculated against the wrong figure and someone has to correct it by journal.

Intercompany balances are a second weak spot. Two entities can revalue the same balance at slightly different rates, or on different days, and the mismatch only shows up at consolidation.

Manual rate entry is the third. It is rarely logged well.

Questions to ask the people who run it

Written procedures for this process tend to describe the system design. The people doing the work often have their own fixes and shortcuts. These questions bring those out.

• When the rate feed fails, who notices first, and what do they do?
• Does anyone ever override a system rate on an individual transaction? Who approves that?
• How does the deal rate from treasury reach the person posting the payment? Email, upload, or something else?
• Which currencies cause the most correcting journals, and why?
• Are there bank accounts or balances left out of revaluation on purpose?
• Do both sides of an intercompany balance use the same rate and date? Who checks?
• What gets reconciled at period end that the procedure does not mention?
• If the rate policy changed tomorrow, which reports or spreadsheets would break?
• Who outside finance relies on these converted figures, such as sales teams quoting prices or procurement comparing bids?

Before changing anything

Map who touches the rate table and who can post to the gain and loss accounts. Those two points of control tell most of the story. A change that moves either of them should go past the controller and the external auditors early, since rate policy and revaluation method both feed into the audited accounts.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.