Choosing the pivot currency

Using Base Currency as Pivot

This option splits the currency risk. This is typically used when the business unit represents a subsidiary reporting to a parent operating in another currency. The pivot is the base currency which is the currency of the subsidiary.

In this situation, local currency fluctuations are absorbed by the subsidiary. On consolidation into reporting currency, the risk between the local book currency and the reporting currency is absorbed by the parent.

This can also be used in high inflation economies, where the second base currency is the revalued base amount.

Using Transaction Currency as Pivot

This option meets GAAP requirements to report in both a base or local currency and a reporting currency. By using the transaction currency as the pivot, all currency risk is taken by the parent. The transaction values are converted independently into the local book (base) currency and the reporting currency. The reporting currency can then be consolidated.

Using Second Base Currency as Pivot

This option meets the euro triangulation accounting regulations which, during the implementation of the euro, required organizations in the euro zone to convert between currencies via the euro. The euro was held as second base currency, and the legacy currency as base currency, or vice versa, with the euro as pivot.