General background: We use
Multi-Currency Accounting
Answers
Are you cash or accrual
Are all your bank accounts in USD?
Use the rate in XE.com for that day. That will be the basis for the FX gain/(loss).
1
Using a daily FX rate is fine, but be sure you understand which rate you are using as this will impact your P &L related currency risk (transaction risk). Choosing the FX rate(s) at quarter end, or another relevant time period, will impact your balance sheet risk from currency exposures.
Dear Anonymous:
You have 3 alternatives:
Spot at last day of the month
Easiest to manage
Congruent with Balance Sheet
An average rate of the daily spot rates
Actual spot rate at which the P&L transactions are realized
With 20 years experience as a practitioner at MNC and as I have advised my clients, make it easy on yourself. If high volumes with systems in place to support it use actual spot rate, low volumes no systems use average.
David L. O'Brien, CTP
Consultant in
[email protected]
What was not mentioned in the previous posts is the ROOT of your problem......the ABSENCE of conversion clauses/details and/or FX risks in your contracts. You should include this in your new contracts and contract renewals or encourage
If not, this WILL (note that I did not say "potential") be a headache in the future, especially during currency volatility. The problem is not only on how you book/convert but it will also affect CUSTOMER'S costs....and if it hits (disadvantageous) them....they will balk It is better (for all) to have conversion rates and FX currency risks laid out in the contracts.
I agree with Brian, make it easy for yourself and consistent.
Your Treasury should lay out FX currency risks policies that are congruent with your business model. This may even affect your business model and your company may change its contract negotiating stance. This is a MAJOR part of your revenue model and Management (and the Board) should look at this more deeply.
I also assume that you have FX currency accounts (here in the US or abroad).?
The Treasury policy (in accordance to FX risks policies) will determine WHEN you convert to US dollars....but for reporting purposes (of remaining FX currency), it is usually spot rates at end of the month.
Note (or maybe a reminder) that once you invoice in say Euros and they pay in Euros, the currency
2
Emerson -
There is always a risk when one does FX. All the hedging in the world won't help, because an hedge is just another way as saying "gambling" that you have hedged on the right side.
If you happen to have an FX account (s), and you have expenses in that currency, that's almost a perfect scenario (not a hedge) and then you just need to decide what is the conversion rate of each segment of the transaction(s). Note the conversion I am speaking about is for your US based G/L, not necessarily a conversion of FX into USD.
The conversion of costs (the former concept) won't have any effect on cash, nor really give you a "real" loss or gain, just paper losses/gains. The latter can potentially lead to loss of cash from both FX changes and of course multiple bank fees (they have to make their money). But then again, can also lead to real gains....
My advice: if you're not in the FX game; don't have on staff someone who is very experienced in hedging, play it very simple and the should you have a FX account, wire the funds to your US account same day it is received. You then minimize your FX gain/loss.
Wayne,
I did NOT even touch hedging in my post. Hedging is an instrument to mitigate (or peg) the risk. I was tackling the simple FX currency risk of invoicing dollar based costs to a FX currency (invoice) and then expecting a FX currency payment to the eventual conversion to dollars. Once you invoice in FX currency, the company is already taking the risk that they may or may not get the full value of the original USD amount.
Remember, you are already recognizing/pegging your revenue at the invoice conversion date. What you get at eventual conversion to dollars is a real/gain or loss.
The rests of your points, I agree but in the overall context of an FX currency risk policy laid out by Treasury and approved by the board. Their revenue model (invoicing) is so full of risks that the Board should be involved.
At the end of the day, contracts should be worded with as much specificity as possible to avoid different interpretations. Whoever is bearing the risk (currency); what conversion rates and where to get it from should be clear to avoid issues further down the road.. From MY point of view, this is the root of the problem of the poster.
Thanks for the insight. Not planning on doing any hedging at the moment. We are trying to institute clauses in our contracts to denote the currency that they will pay in. Not as easy because some balk at the demand but others are fine with it.
Based on the comments, it sounds like we should use the spot rate for both invoicing (last day of the month) and also a spot rate for when the payment comes in. We aren't using any advanced systems to track currency at the moment so we will likely use whatever functionality is in QB.
Simply convert the daily transactions in FX currency to USD on a monthly average rates. At the time of period end close, any FX assets or liabilities to be restated based on the closing rate with the difference being accounted to profit and loss as Exchange rate fluctuation.
Also you need to make sure that you book realised exchange rate fluctuation gain/loss on the balance sheet items which are settled. This is done using the monthly average rate.
If you have large volume of FX transactions, you can adopt a FX rate policy whereby you can use a particular FX rate for a particular period of time. For example Use Rate X1 Rate as on 1)for 1st - 10th of Month, Use X2 (Rate as on 11 ) for 11th - 20th , Use X3 (Rate as on 21st ) for 21st - last day of month. This will ease out the pressure of checking daily rates and also fairly give a rate which is an average for the month.
As pointed out by Emerson once you have the contracts drawn in a manner which fixes the FX risk with you and customer, you have better visibility. However, if the customer pushes back and you have to bear the FX risk, depending upon the size of the FX currency
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