Multi-Currency in Xero: Setup and Best Practices

Multi-Currency in Xero

If your business deals with customers or suppliers in other countries, you need to handle multiple currencies. Xero makes this manageable, but there are important setup steps and best practices to follow.

Enabling Multi-Currency

Multi-currency is available on the Xero Premium plan. To enable it, go to Settings then General Settings then Currencies. Here you can add the currencies you work with.

Once enabled, you can:

• Send invoices in foreign currencies
• Record bills in foreign currencies
• Maintain bank accounts in different currencies
• Track exchange rate gains and losses automatically

Setting Up Currencies

Add Currencies You Use

Add each currency you transact in. Common additions for Australian businesses include:

• USD (US Dollar) - for American clients or suppliers
• GBP (British Pound) - for UK dealings
• NZD (New Zealand Dollar) - for trans-Tasman trade
• EUR (Euro) - for European transactions
• SGD (Singapore Dollar) - for Asian business

Exchange Rate Sources

Xero automatically pulls exchange rates from XE.com daily. When you create an invoice or bill in a foreign currency, Xero uses the rate for that date. You can override the rate if you have a contracted or agreed rate.

Working with Foreign Currency Invoices

Creating Invoices

When creating an invoice, select the currency from the dropdown. The line items are entered in the foreign currency, and Xero calculates the AUD equivalent using the day's exchange rate.

Your customer sees the invoice in their currency. Your books record both the foreign currency amount and the AUD equivalent.

Receiving Payments

When payment arrives, the exchange rate may have changed between invoice date and payment date. Xero handles this automatically:

1. If the AUD value at payment is more than at invoice date, Xero records an exchange rate gain.
2. If the AUD value at payment is less, Xero records an exchange rate loss.

These gains and losses flow through to a dedicated "Unrealised Currency Gains" and "Realised Currency Gains" account in your P&L.

Foreign Currency Bank Accounts

If you hold bank accounts in foreign currencies (e.g., a USD account with a service like Wise), set these up in Xero as separate bank accounts with the appropriate currency.

Transactions in these accounts are recorded in the foreign currency and converted to AUD at the prevailing rate. Bank reconciliation works the same way as with AUD accounts.

Best Practices

Use Consistent Exchange Rates

For tax purposes, you need to use a consistent and defensible method for determining exchange rates. The ATO accepts:

• The rate on the date of the transaction
• A monthly average rate
• The rate published by the Reserve Bank of Australia

Whatever method you choose, apply it consistently.

Monitor Currency Exposure

If you have significant foreign currency receivables or payables, exchange rate movements can materially affect your profitability. Monitor your exposure and consider hedging strategies for large amounts.

Reconcile Foreign Currency Accounts Carefully

Foreign currency bank reconciliation involves an extra step - you need to check that both the foreign currency amount and the AUD equivalent are correct. Small discrepancies can arise from rounding differences in exchange rate calculations.

Revalue at Period End

At the end of each reporting period (monthly, quarterly, or annually), run a currency revaluation to update the AUD value of outstanding foreign currency balances. In Xero, go to Accounting then Bank Accounts and click "Revalue Currency."

This ensures your balance sheet accurately reflects the current value of your foreign currency assets and liabilities.

Set Up Contact Defaults

For contacts you regularly transact with in a foreign currency, set the default currency on their contact record. This saves you from selecting the currency each time you create an invoice or bill for them.

Report in Your Base Currency

All Xero reports are presented in your base currency (AUD). This gives you a consistent view of business performance regardless of how many currencies you transact in.

If you need to see performance in a specific currency, use tracking categories to segment your business by geographic market.

Common Multi-Currency Challenges

Exchange rate discrepancies with banks: Your bank's exchange rate will differ from the rate Xero uses (sourced from XE.com). The difference is usually small but creates minor discrepancies during reconciliation. Record these as exchange rate adjustments.

GST on foreign transactions: Exports from Australia are generally GST-free. Imports may attract GST (and customs duties) at the border. Make sure you apply the correct GST treatment.

Transfer pricing: If you transfer money between your own accounts in different currencies, the exchange rate at the time of transfer determines the AUD value. Record any gains or losses.

Multi-currency accounting adds complexity, but Xero handles most of it automatically. The key is proper setup, consistent practices, and regular reconciliation. For businesses with high volumes of international transactions, AI tools like SortBooks can help by automatically categorising foreign currency transactions and flagging exchange rate anomalies for review.