Dual-currency reporting in a volatile-currency economy.

Rajat Gupta · 7 min read

In a volatile-currency economy, the most dangerous number in your board pack is the one that looks most objective: return on capital employed. Compute it naively — local-currency profit over a local-currency balance sheet — and every devaluation quietly flatters you. The asset base shrinks in real terms while revenue reprices upward, and RoCE climbs for reasons that have nothing to do with how well the business is run.

If the currency halves and your RoCE doubles, you have not become twice as good. Your denominator has been devalued.

The dual-currency method

The discipline that survives a board, a lender or a diligence team is to carry the capital base in the currency in which it was actually invested. Assets funded in hard currency — imported machinery, foreign-funded capex — are carried at their historical hard-currency cost. Locally-originated items — working capital, local assets — translate at closing or average rates as appropriate. The difference between the two views does not vanish; it is disclosed separately in equity as a translation reserve, where everyone can see it.

Profit follows the same logic: measure operating performance at the average rate for the period, but state the return against the capital measured in its origin currency. What emerges is a pair of numbers — a local-currency RoCE and a hard-currency RoCE — and it is the spread between them that tells the truth. A business earning 25% locally but 9% in hard currency is not a 25% business; it is a 9% business operating in a depreciating environment.

Why boards should insist on it

• Capital-allocation decisions — expand, hold, or repatriate — are hard-currency decisions. A local-only RoCE cannot answer them.
• Lenders and buyers will rebuild the number in hard currency anyway. Presenting it yourself, with the method footnoted, is what credibility looks like.
• Management incentives tied to local RoCE reward devaluation. Tied to the dual view, they reward performance.

The practical rules

Fix the historical rates at the date each asset was funded and never restate them. Keep a bridge from the statutory balance sheet to the dual-currency capital base — one page, auditable. Disclose the translation reserve movement every month, so the board watches the currency cost accumulate rather than discovering it at year-end. None of this is complicated. It is simply the difference between reporting what the currency did and reporting what the business did.