A UK-resident SaaS company selling globally is rarely operating in sterling alone. Customers pay in USD, EUR and other currencies, AWS and other suppliers invoice in USD, and the underlying sterling-reported numbers therefore include the impact of foreign exchange movements. FRS 102 sets out how to handle this in the statutory accounts. The headline issues are functional currency, transaction date FX rates, period-end retranslation and the treatment of FX gains and losses.
Functional currency
Under FRS 102 Section 30, each entity has a functional currency, defined as the currency of the primary economic environment in which it operates. For a UK-resident company with predominantly UK staff, UK costs and a sterling cash balance, the functional currency is almost always sterling, even if the majority of revenue is invoiced in USD. The functional currency is a question of fact, not choice, and changes are rare.
The presentation currency is the currency in which the financial statements are reported. UK companies report in sterling by default. A separate election to present in another currency is permitted in some circumstances but is unusual.
Transaction-date FX
Foreign-currency transactions are translated to the functional currency at the spot rate at the date of the transaction. For high-volume operations, FRS 102 permits the use of average rates over a short period as a practical approximation, provided the rates do not differ materially from the spot. Most SaaS companies use the published Bank of England daily rates or a recognised rate provider.
An invoice raised in USD on 15 January at a USD/GBP rate of 1.25 is recorded in the ledger at the sterling equivalent on that date. The customer pays on 28 February at a rate of 1.30. Between invoice and receipt, the GBP value of the receivable has moved, and that movement is a foreign exchange gain or loss going to the profit and loss as it crystallises.
Period-end retranslation
Monetary items denominated in foreign currency (receivables, payables, cash, loans) are retranslated to the functional currency at the closing rate at the reporting date. The resulting gain or loss is recognised in profit or loss in the period.
Non-monetary items measured at historical cost (such as fixed assets purchased in foreign currency) are not retranslated. They remain at the original sterling cost.
FX gains and losses in the P&L
For SaaS companies, the most common FX impacts in the P&L are:
- Realised gains and losses from settlement of foreign-currency invoices, USD-denominated cloud bills and EUR-denominated payroll where applicable.
- Unrealised gains and losses from retranslation of foreign-currency cash balances and receivables at period end.
- Hedging gains and losses where formal forward contracts or other instruments are used to manage exposure. FRS 102 has specific hedge-accounting rules for entities choosing to apply them.
For investor reporting, many SaaS businesses present an "FX-neutral" view of revenue growth, holding rates constant period over period. This is a useful internal metric but is not a substitute for the statutory numbers.
USD-heavy SaaS businesses
A common profile is a UK-resident SaaS company with the majority of revenue in USD (often invoiced via a Stripe account) and the majority of costs in sterling. Such a business has a structural long USD position: cash sitting in USD, USD receivables and ongoing USD inflows. Sterling weakness improves the reported revenue figure but does not change the underlying business performance.
From a treasury perspective, several options exist:
- Hold USD balances and pay USD costs (such as AWS) directly from a USD account, reducing the conversion drag.
- Convert at month end to sterling, accepting the FX movement.
- Use forward contracts to fix the rate on known future receipts.
The accounting follows the cash management policy: cash held in USD remains in USD on the balance sheet, retranslated each period end.
VAT and FX
For VAT-registered businesses, supplies in foreign currency must be converted to sterling for VAT-return purposes using the rate at the time of supply. HMRC accepts the published exchange rate from HMRC, the period rate or a Bank of England rate, applied consistently. The sterling figures in the VAT return may differ slightly from the sterling figures in the financial accounts due to different rate sources, although the difference is normally immaterial.
Practical recommendations
- Document your FX policy. State your functional currency, presentation currency, transaction rate source and revaluation methodology.
- Set up your accounting software to use a consistent rate source. Both Xero and QuickBooks support multi-currency on appropriate plans.
- Reconcile foreign currency bank accounts and clearing accounts every period.
- Separate realised from unrealised FX in management reporting, especially during periods of currency volatility.
How we help
PushDigits prepares FRS 102-compliant statutory accounts for multi-currency UK SaaS businesses and supports the underlying treasury and bookkeeping work. See our annual accounts and bookkeeping pages, or book a consultation.