Accounting for foreign currency?

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Forums › Finance and wealth management › Accounting for foreign currency?

snowfly

543 posts

Ultimate Geek

#80774 4-Apr-2011 14:52

Any accountants or wannabe accountants or financial gurus on geekzone?

Being self employed as a sofware developer (as a NZ Ltd Company) I've been doing my own accounts so far, been perfectly fine, but recently started invoiving an Aussie company in AUD for development services I perform for them.

Not 100% sure on the ways of accounting for foreign currency.
The main question is how do I calculate gains/losses on foreign currency (for the income statement).

Take this simple example:

1. On 1 Jan 2011 I invoice Aussie Co $100 AUD, rate = 1.2, = $120 NZD (recorded as income).

2. On 31 Jan 2011 Assue Co pay $100 AUD (bank takes $10 AUD as TT fee) into my foreign currency bank account (in NZ).
On this date, rate has increased to 1.25
So I record a $10 AUD bank fee under expenses at 1.25, = $12.50 NZD
And I record a $100 AUD payment from customer at 1.25, = $125.00 NZD
Foreign Currency Bank Balance: $90.00 AUD

Now at this point what do I record as a foreign currency gain? $5 NZD?

3. On 15 Feb 2011 I transfer the $90 AUD from the foreign currency bank account, into my $NZD standard business account, and rate has increased again to 1.30
So $90 AUD = $117 NZD.

At this point what do I do? Originally the $90 AUD was worth $112.50 NZD on 31 Jan (rate 1.25).
And now its worth $4.50 NZD more.
Does this go into realised foreign currency gain?

At this stage I am trying to stay away from using systems such as Zero and MYOB, because everything has worked so far, and I have built my own PHP + MySQL simple accounting system which generates my invoices, etc.

Any tips? (other than moving to Xero, or going to an accountant - which I have to do if I can't figure this out)

timmmay

20574 posts

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#455128 4-Apr-2011 14:56

Well my tip was going to be "just use xero", which handles foreign currency for you, but I guess instead you'll have to pay a professional to give you an answer to your question(s). I don't think you should trust advice you get online.

You can always call the IRD and ask them.

wreck90

780 posts

Ultimate Geek
Inactive user

#455139 4-Apr-2011 15:52

Why are you recording the invoice as income on 1 Jan?

In my case, I just record income when I receive it, not when I invoice it (payments basis). This pretty much solves the problem of changes in the exchange rate.

As long as what you report matches what you actually received, then it doesn't really matter what convoluted calculations you may like go through.

In your case, I would record Income (via fx Gain) of NZ5.00 on 31 Jan 2011.

For point 3, I asked IRD a similar question some years ago. You have actually experienced a capital gain since you reported the income. There is no capital gains tax in NZ so you profit!

Just like people with foreign bank accounts don't have to report an increase/decrease in value due to exchange rate fluctuations. But, you do have to report the interest income at whatever the fx rate happens to be at the time.

PS, I am not an expert just relaying what was told to me - if you find out any different ,let us know, and I can report a huge expense loss in the loss in value of my foreign account!!! And, that would be a very nice tax deduction if I could make it, unfortunately IRD said I couldn't :(

timmmay

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#455147 4-Apr-2011 16:15

I keep money in a foreign currency account that Xero monitors. Every month I see foreign currency loss or gains in Xero, and it goes against my monthly income as a profit or loss.

Personally I figured it should probably only be accounted for once it's used or moved to NZD, but what do I know - nothing much about accounting, which is why I use Xero :)

alasta

6701 posts

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#455217 4-Apr-2011 18:31

It's normal for companies transacting in foreign currency to have an account on their P&L called something along the lines of "gains/losses on foreign currency". So, whenever you perform an action which results in an increase in the NZD value of your foreign currency then you would:

Dr The Appropriate Balance Sheet Account (e.g. Bank Account or Accounts Receivable)
Cr Gain/Loss on Foreign Currency

For a decrease in the NZD value of your foreign currency then just do the opposite of the above.

It would be a good idea to put procedures in place to ensure that you have supporting documentation for any FX revaluations that you may perform. You should also seek professional advice on the tax implications of any FX revaluations - I suspect that they are non tax deductable but this is outside of my expertise.

snowfly

543 posts

Ultimate Geek

#455508 5-Apr-2011 13:03

Thanks for the replies guys.

After doing some more reading and research I think I have it sussed.

I had to have gains/losses on both accounts receivable (invoices), and on the bank account.
And each would have realised and unrealised.

So in my original example, I would have:

- Accounts receivable realised gain: $5.00 (for the 1 Jan invoice being paid on 31 Jan)

- Bank account unrealised gain: $4.50
(the $90 AUD received on 31 jan was worth $112.50, and on 15 feb it waas worth $117)

My P&L statement would then have this listed under expenses (as a negative number cause it was a gain):
Foreign Currency Gains/Losses: -$9.50