What is multi-currency and why is it important?
Do you plan to hold or receive payments in different currencies? If yes, then you will need multi-currency support for your accounting.
Having a multi-currency bank account will allow your business to hold funds in more than one currency.
This is useful when you want to:
- Speed up the payment processing time
- Avoid high currency exchange fees
- Hedge your risk between different currencies
The alternative is to operate your business on a single currency account and only accept or operate your company in one currency.
Why is multi-currency important?
When running a business across borders, you can avoid the pain of having to manage multiple currencies by choosing to have a multi currency account. With a multi currency account, you can send and receive cash in different currencies and avoid paying for the exchange rate between those payments.
When dealing with multiple currencies, you have to account for the different values in invoices/transactions against the actual value of the conversion rate during the payment. If you have several reporting periods, the conversion rate of the date will be applied but if it is any different from the previous reporting value, it will then be recorded as a gain or a loss.
A key consideration when choosing to operate on a multi currency account is to always keep a clear view of your accounts so that you can monitor your cash flow and remain compliant. When operating in Singapore, it is a set practice for multi-currency invoices to automatically show the Singapore dollar conversion on the invoices, making it easier to be compliant with the Inland Revenue Authority of Singapore (IRAS) foreign invoice requirements.
What is base/functional currency?
Base currency refers to the currency that you choose to do all your accounting in.
It is crucial that you choose the right base currency for your company as all your reporting will need to be completed in that chosen currency.
As per Singapore’s guidelines*, your base currency should be reflective of the currency in which you conduct the majority of your business transactions and the main currency that your business may receive any funding. Funding refers to private funding like SME loans, shareholder investments, or loans from holding companies.
Click here to find out more information when deciding which base currency to choose.
*Take note that when determining your base currency, Accounting Standard on Functional Currency (FRS 21) should be considered.
Benefits of using accounting software like Xero to manage your multi-currency activities
Xero is an online platform for small businesses and their advisors around the world.
Xero makes it easy to manage multi-currency accounting for your business as it automatically tracks the gains and losses for more than 160 currencies. Watch the video below for a better understanding.