Foreign currency policy for startups: functional currency, monthly revaluation, and intercompany rules

Foreign Currency Management for Startups: Setting a Strong Foundation

Your US-based SaaS company is finally seeing real traction from its new UK sales team. The pipeline is growing, and the first few deals have closed in British Pounds (GBP). But back at headquarters, the financial picture is getting blurry. The monthly close is taking longer, your burn rate seems to fluctuate unpredictably, and converting those GBP revenues into a clear picture of your company’s health is becoming a major headache. A simple, documented accounting policy for foreign currency is not corporate overhead; it is a foundational tool for managing runway, maintaining accurate KPIs, and building investor confidence as you scale internationally.

Part 1: Choosing the Right Functional Currency for Each Entity

The first and most critical decision in your international financial management is selecting the correct functional currency for each legal entity. This is not just an accounting formality; the choice has significant downstream effects on your financial statements. The key question is this: what should a subsidiary's official 'functional currency' be? The answer is not always its local currency.

An entity's functional currency is the currency of the primary economic environment in which it operates. It is the currency in which the entity primarily generates and expends cash. For US companies, accounting standards for foreign currency matters are governed by GAAP ASC 830, while international companies typically follow IFRS IAS 21. You should use an accounting policy manual to document your determination and its rationale.

Consider our running case study: a US SaaS parent company with a UK sales subsidiary. The US parent’s functional currency is clearly the US Dollar (USD). The UK subsidiary, however, operates primarily in the UK market. It bills customers in GBP, pays employee salaries in GBP, and covers its office rent in GBP. Therefore, its functional currency should be GBP.

Choosing the wrong functional currency can trigger major compliance and reporting issues. If the UK sub’s functional currency were incorrectly set to USD, every single GBP transaction would generate a foreign exchange (FX) gain or loss on its books. This would constantly distort its operational performance, misstating key metrics like revenue and burn rate. This is one of the most common pain points, leading to non-compliant reporting that frustrates investors who cannot get a clear picture of the subsidiary's standalone performance.

The determination is different if the subsidiary's operations are just an extension of the parent. For instance, a US-based Biotech startup might set up a UK entity solely for R&D. If that UK entity is funded entirely by USD from the US parent and has no local revenue, its primary economic environment is tied to the parent. In this case, its functional currency could correctly be designated as USD, even though its local currency is GBP.

Part 2: The Monthly Rhythm of Multi-Currency Accounting

Once the functional currency is set, the next step establishes a monthly rhythm for handling transactions and closing the books. This process breaks down into two key activities: daily transaction recording and month-end revaluation. Getting this cadence right is crucial for accurate cross-border financial operations.

Daily Transaction Recording

For day-to-day transactions, each entry must be recorded in the subsidiary’s functional currency using the exchange rate on the date of the transaction. This rate is known as the spot rate. For example, if your UK sub pays a £500 software bill on the 15th of the month, your accounting system records the £500 expense and translates it to the parent’s reporting currency (USD) using the spot rate for that day. You can find reliable sources for currency exchange rates from providers like OANDA, XE, and Bloomberg.

Month-End Revaluation and Remeasurement

At the end of each month, you must perform a revaluation. This is where the process can get messy. Manually tracking spot and month-end FX rates can lead to difficult reconciliations and hidden gains or losses. The revaluation process involves adjusting the value of certain accounts on your balance sheet to reflect the new month-end exchange rate. The critical distinction here is between monetary and non-monetary items.

• Monetary Items: These are assets and liabilities fixed in a specific currency amount, like cash, accounts receivable, and accounts payable. These must be revalued using the current month-end exchange rate. The difference between the value at the historical rate and the new revalued amount is booked as an unrealized gain or loss on FX to the Profit & Loss (P&L) statement.
• Non-Monetary Items: These items, like fixed assets or prepaid expenses, are not revalued each month. They remain on the books at the historical exchange rate from the date they were acquired. See our fixed asset policy for guidance on capitalization and depreciation rules that determine when an item becomes a fixed asset.

The reality for most Pre-Seed to Series B startups is more pragmatic: this process should be automated. Manual revaluations using spreadsheets are highly prone to error and are a primary cause of delayed closes. Accounting software with multi-currency capabilities, including QuickBooks Online (Plus or Advanced plans) and NetSuite, can automate this process, saving significant time and improving accuracy.

Part 3: Managing Intercompany Balances to Avoid P&L Volatility

As you fund your international subsidiary, you will create intercompany balances. Typically, the US parent sends cash to the UK sub to cover payroll and operating costs. This creates an intercompany loan, where the subsidiary owes the parent. How you account for this loan is a critical part of your currency risk management strategy.

Skipping a clear policy for these balances exposes you to sudden P&L swings. If the intercompany loan is treated as a standard, short-term loan, it falls into the 'monetary liability' category. This means it must be revalued every single month at the current exchange rate. A small fluctuation in the USD/GBP rate can create a large, non-operational FX gain or loss on your consolidated P&L. This noise obscures your true operating performance and leads to difficult questions from your board and investors who want to see clean, predictable results.

The solution is to formally designate the intercompany funding as being 'of a long-term investment nature,' meaning settlement is not planned or anticipated in the foreseeable future. This is a critical policy decision that helps to avoid P&L volatility.

With this designation, the accounting changes significantly. The FX gains and losses from revaluing the long-term intercompany loan bypass the P&L entirely. Instead, they are recorded in a special equity account on the consolidated balance sheet called the Cumulative Translation Adjustment (CTA) account. This treatment provides a much clearer view of your operational results by separating them from non-cash currency fluctuations. Also see the related party transaction policy for approval and disclosure guidance.

Part 4: A Practical Template for Your Foreign Transaction Policies

To formalize your approach, you do not need a 50-page document. A simple one-page memo can provide clarity for your team, auditors, and investors. You can also review our accruals and prepayments policy for related cut-off procedures. Use the following template to draft your internal foreign transaction policies.

Internal Memo: Foreign Currency Management Policy

1. Purpose

This policy outlines our procedures for foreign currency transactions, translation, and remeasurement to ensure accurate and compliant financial reporting for our cross-border financial operations.

2. Functional Currency Designation

• US Parent Inc.: The designated functional currency is the US Dollar (USD).
• UK Subsidiary Ltd.: The designated functional currency is the British Pound (GBP).
• Rationale: The UK entity's revenues, expenses, and cash flows are primarily generated and settled in GBP, reflecting its primary economic environment.

3. Exchange Rate Sources & Policy

• Daily Transactions: All foreign currency transactions will be recorded at the daily spot rate provided by our accounting system, QuickBooks Online (Plus or Advanced plans), which sources rates automatically.
• Month-End Revaluation: Monetary assets and liabilities denominated in a foreign currency will be remeasured using the month-end closing rate from OANDA.

4. Intercompany Funding Policy

• Designation: All funding provided from US Parent Inc. to UK Subsidiary Ltd. is designated as a long-term intercompany loan. Settlement is not planned or anticipated in the foreseeable future.
• Accounting Treatment: Gains and losses from the remeasurement of this intercompany loan will be recorded directly to the Cumulative Translation Adjustment (CTA) account within Equity, bypassing the P&L.

5. Monthly Close Process

1. Ensure all transactions are recorded in their native currency throughout the month.
2. At month-end, confirm the closing exchange rate is updated in the accounting system.
3. Run the automated currency revaluation report in QuickBooks Online.
4. Review the P&L for operational FX gains/losses and the Balance Sheet for changes to the CTA account.

6. Roles & Responsibilities

• The Finance/Ops Lead is responsible for ensuring the month-end exchange rates are correct and for running the revaluation process.
• The CEO/Founder is responsible for reviewing the consolidated financial statements and understanding the impact of currency movements on performance.

7. Governing Accounting Standards

This policy is designed to comply with GAAP ASC 830 for US reporting and consolidation and is consistent with the principles of IFRS IAS 21.

Building a Stable Foundation for Global Growth

Establishing a foreign currency policy may seem like a task for a more mature company, but for any startup with international operations, it is a critical step. Getting these fundamentals right from the beginning prevents major headaches down the road. A clear policy on functional currency, a disciplined monthly close process, and the correct treatment of intercompany loans will ensure your financial reporting is accurate, your KPIs are meaningful, and your conversations with investors are focused on business growth, not accounting adjustments. Find broader templates at our accounting policy documentation hub. Use the checklist provided to create a simple policy today that will serve as a stable foundation for your global expansion.

Frequently Asked Questions

Q: What is the biggest mistake startups make with foreign currency management?
A: The most common error is incorrectly setting the functional currency of a foreign subsidiary to the parent company's currency (e.g., USD instead of GBP). This creates constant, non-operational FX gains and losses on every transaction, distorting the subsidiary's true performance and making financial analysis difficult for founders and investors.

Q: Can I just use the local currency as the functional currency for every subsidiary?
A: Usually, but not always. The functional currency should be that of the primary economic environment where the entity operates. If a UK subsidiary generates revenue and pays expenses primarily in GBP, then GBP is appropriate. But if it's an R&D hub funded entirely in USD by a US parent, its functional currency may correctly be USD.

Q: How does multi-currency accounting software like QuickBooks or Xero help?
A: These platforms automate key processes in foreign currency management. They fetch daily and month-end exchange rates, record transactions at the correct spot rate, and run automated revaluation reports. This saves time, reduces manual error, and helps ensure a faster, more accurate monthly close.

Q: What is a Cumulative Translation Adjustment (CTA) and why does it matter?
A: The CTA is an account in the equity section of the consolidated balance sheet. It is used to record FX gains or losses from long-term intercompany loans and the translation of a subsidiary's financial statements. By keeping this "paper" volatility out of the P&L, it provides a clearer view of your company's core operational profitability.