Why do exchange rates cause trouble?
Many NGOs get funds in one currency, spend in another and report in a third. A donor pays in euros, you buy locally in a local currency, and your headquarters reports in dollars. Every conversion creates a number that can be disputed.
Rates also move. The same invoice can be worth different amounts on different days. Without a policy, two staff members will convert the same cost two different ways.
What should an exchange rate policy say?
Keep it to one page. It should answer:
- Which currency is your functional currency? This is the main currency of your books.
- Where do rates come from? A named source, such as your bank or a central bank publication.
- Which date is used? The transaction date, the payment date or a monthly average.
- Who maintains the rates, and how often?
- How are balances revalued? At which dates and with which rate.
- Where do gains and losses go?
- What happens when the donor requires a different rate?
What should each entry record?
For every foreign currency entry, keep four facts next to the converted amount:
| Fact | Why it matters |
|---|---|
| Original currency | Shows what was actually paid |
| Original amount | Lets anyone recheck the conversion |
| Rate | The number used |
| Rate date | Shows which day’s rate it was |
With these, an auditor can recalculate any figure. Without them, the converted number stands alone and cannot be checked.
How do you handle gains and losses?
Two kinds appear:
- Realised. You received or paid money at a rate different from the one you recorded.
- Unrealised. You hold a balance, such as cash in euros, and its value changed at period end.
Record both in separate accounts, and show them in your reports. Hidden gains and losses make a budget variance impossible to explain. Our article on the budget vs actual review explains why you should separate price changes from activity changes.
How do you report to a donor?
Check the agreement for the reporting currency, the rate rule and any limit on gains or losses. Then:
- Produce the report in the ledger’s functional currency.
- Convert to the donor’s currency with the stated method.
- Keep a short note that shows the rate source, the date rule and the totals.
- Reconcile the converted total to the funds received, and explain the difference.
If the donor sets a fixed budget rate, compare actuals both at the budget rate and at the real rate, so you can see what is activity and what is currency.
A worked example
An NGO’s functional currency is the US dollar. A donor pays 100,000 euros for a grant. On the day the money arrives, the policy rate is 1.10, so the ledger records 110,000 dollars received.
Two months later, the office pays a local supplier 40,000 in local currency. The policy rate on the payment date is 0.00025 dollars per unit of local currency, so the expense is 10,000 dollars. The entry keeps the original amount of 40,000, the rate and the date.
At month end, the office still holds 60,000 euros in its bank account. The month-end rate is 1.08, so the euros are worth 64,800 dollars, though the ledger shows 66,000. The 1,200 difference is an unrealised loss. The accountant posts it as its own journal, in the gain-or-loss account, with a note on the rate source.
When the donor report comes, the team converts the figures to euros with the rate rule in the agreement, and shows both the ledger figures and the converted totals. The note explains the difference between the two.
Habits that prevent disputes
- Update rates on a fixed day, such as the first working day of each month.
- Keep a dated rate table, so each rate has a source and an owner.
- Do not overwrite old rates. Add new ones.
- Recheck any entry where the rate is far from the usual range.
- Lock the rate table at month end, with the same care as the ledger.
What to ask the donor early
Ask for the reporting currency, the rate rule, the treatment of gains and losses, and the treatment of interest earned on the grant. Get the answers in writing, and file them with the agreement. Rules differ between donors and countries, so avoid assumptions.
A short checklist before you submit a report
- Confirm the rate table is complete and locked for the period.
- Check that every foreign entry shows an original amount and a rate date.
- Recalculate three entries by hand.
- Confirm that gains and losses are in their own accounts.
- Read the donor’s currency clause once more.
Where EMPOBase fits
In EMPOBase, you set an organisation functional currency. Each entry keeps its original currency, amount, rate and rate date next to the functional amount. Exchange rates are maintained per organisation by your finance team and are not pulled from a live feed. Revaluations post as their own journals, so the trail stays visible. Check each donor’s currency rule yourself. See the platform overview.