Weighted average rate
The weighted average rate (WA) takes into account the varying degrees of importance of numbers in a data set. You can use this rate type only if you prepare financial statements every month. Therefore, you must maintain the weighted average rate for every month.
Typically, the average conversion uses the average rate of the period to convert the YTD value. The weighted average conversion uses the average rate of the specific period to convert each period’s movement and adopts the converted value of the previous period. The weighted average conversion is required by the Financial Accounting Standards Board (FASB) Statement No. 52.
Weighted average is calculated for each period based on the volume of balances that are defined for each period. So, at the end of each period, WA is calculated according to how much the local balance volume has contributed to the total balance.
This table shows an example how weighted average is calculated:
| Period 1 | Period 2 | Period 3 | |
|---|---|---|---|
| Average rate (1 EUR/USD) | 1.20 | 1.30 | 1.40 |
| Periodical change (USD) | 300.00 | 200.00 | 400.00 |
| Total YTD value (USD) | 300.00 | 500.00 | 900.00 |
| Converted values in the group currency (EUR) | 250.00 | 403.85 | 689.56 |
| Weighted average rate | 1.20 | 1.24 | 1.31 |
In period 1, with the exchange rate 1 EUR to 1.20 USD, the periodical change in the local currency is 300 USD. Therefore, the total YTD value in the local currency is 300 USD. This results in the balance of 250 EUR in the group currency. The weighted average rate for period 1 is the same as the average rate.
In period 1, the weighted average rate is calculated by this formula:
300 (YTD total balance in local currency)/250 (YTD total balance in group currency) = 1.20In period 2, the periodical change of 200 USD in the local currency is calculated with the average rate of 1.30, which results in 153.85 EUR in the group currency. The group currency results for period 1 and period 2 give the total value of 403.85 EUR. The weighted average rate is calculated through dividing the local currency YTD value of 500 USD by the converted value of 403.85 EUR in the group currency.
In period 2, the weighted average rate is calculated by this formula:
500 (YTD total balance in local currency)/403.85 (YTD total balance in group currency) = 1.24In period 3, the periodical change of 400 USD in the local currency is calculated with the average rate of 1.40, which results in 285.71 EUR in the group currency. The group currency results for period 2 and period 3 give the total value of 689.56 EUR. The weighted average rate is calculated through dividing the local currency YTD value of 900 USD by the converted value of 689.56 EUR in the group currency.
In period 3, the weighted average rate is calculated by this formula:
900 (YTD total balance in local currency)/689.56 (YTD total balance in group currency) = 1.31If the value in the local currency is 0, there may be still a value calculated in the group currency. This can happen if an amount is completely reversed in the next period. Because the reversal happens in a different month, the reversal is calculated with the YTD average rate of that period. For example,
Period 1: 300/1.2 = 250
Period 2: (0 - 300)/1.3 + 300/1.2 (Currency translation)The result is a group currency value of -19 in period 2.