No Such Thing As A Currency Of Reference
If nobody traded on the exchange rate you wrote down, is it really a record?
Most ledgers approach accounting with foreign currencies wrong.
Every accounting software I know is designed to have, as one of its most fundamental configurations, a currency of reference. The one in which all the ledger’s debits and credits are denominated.
It is a convention so prevalent that we no longer see it. Ledgers may be split into USD subledgers, EUR subledgers, and so on. But that’s because the assumption is that movements across subledgers, across currencies, are rare.
That assumption is becoming less and less correct every day.
I don’t blame you if you don’t agree with me on this. Your day to day is denominated in a single currency. There’s only one currency you think about when you buy groceries, pay your taxes and receive your salary. Only the occasional trip abroad may require thinking of some exchange rate, and even then you use one that’s both fixed and easy to use for mental math.
The US dollar isn’t really worth 0.8 euros, but if you’re buying a souvenir in a flea market, that rate will work just fine.
That, however, is no longer a way in which fintech companies can operate. They aim to be global, and to manage transactions at high volume and high speed. Focusing on a single economic zone with a single currency means missing out on so much of their Total Addressable Market; venture capital would abandon you.
But treating the world as if it were denominated in a single currency is not just an oversimplification, but actively harmful. And yet, most ledgers are designed to do just that, because engineers aren’t used to, or refuse to, think in terms of multiple currencies.
They may say that it’s unnecessarily complex. But the truth is that they just don’t want to do it.
I’m Alvaro Duran, and this is The Payments Engineer Playbook. You’re already subscribed to free newsletters that “teach” you how to get a job as a software engineer.
But you don’t want to get a job; you already have one. What you want is to learn how to be great at your job. Especially as a payments engineer, where stakes are sky-high, and the margin for error is razor-thin.
In The Payments Engineer Playbook, we investigate the technology that transfers money. All to help you become a smarter, more skillful, and more successful payments engineer. And we do that by cutting off one sliver of it and extracting tactics from it.
In today’s article, I’m going to persuade you not to have “base amount” and “base currency” in your ledger’s entries.
Here’s what you can expect in today’s article:
Why multi-currency ledgers are more relevant than ever
Why GAAP and IFRS don’t really require a currency of reference
And what the Green Lumber fallacy has to do with any of this
Enough intro, let’s dive in.
