In QuickBooks the home currency adjustment is calculated based on the difference between the exchange rate recorded with each transaction and the exchange rate as of the home currency adjustment. It’s calculated on:
- Open Accounts Payable transactions in a foreign currency
- Open Accounts Receivable transactions in a foreign currency
- Balance sheet account balances for which transactions in a foreign currency are supported (i. e., bank accounts and credit cards)
It’s important to note that income and expense accounts, as well as other asset and liability are always recorded in the firm’s home currency. Therefore, home currency adjustments do not apply to these account types.
Home currency adjustments are recorded on the Company->Manage Currency->Home Currency Adjustment menu selection.
A home currency adjustment represents the unrealized gain or loss from holding balances in a foreign currency after the original transaction date (for open transactions) or after the date the transaction was closed. For example, if a firm did not extend credit to customers (i. e., it has no Accounts Receivable), did not receive credit from vendors (i. e., it has no Accounts Payable), and had no bank or credit card balances, its home currency adjustment would be zero.
From the Home Currency Adjustment window, QuickBooks automatically posts home currency adjustments by a General Journal entry to the Exchange Gain or Loss account that is automatically created by QuickBooks as an Other Expense account type. Therefore, debits to this account will represent exchange losses and increase this expense; credits will represent exchange gains and decrease this expense.
Home currency adjustments are normally recorded to prepare financial statements, so that balances held in foreign currencies can be converted to the exchange rate as of the financial statement date. If foreign balances were not adjusted to current exchange rates, the balances reported on the balance sheet could materially mis-state a firm’s financial position. The home currency adjustment records an exchange gain or loss to reflect the change in the value of a firm’s balance sheet accounts.
Transactions in a foreign currency involve both realized and unrealized gains/losses. For closed Accounts Payable and Accounts Receivable transactions in a foreign currency, the difference between the exchange rate recorded with each transaction and the exchange rate at the time the transaction was closed (i. e., the vendor bill or the customer invoice was paid) represents a realized gain or loss. Thereafter, holding foreign account balances (i. e., bank and credit card balances) that result from closing such foreign transactions produce unrealized gains or losses. Holding open Accounts Payable and Accounts Receivable balances similarly produces unrealized gains or losses.
The Exchange Gain or Loss account automatically created by QuickBooks records both realized and unrealized gains/losses.
A few examples will better illustrate how QuickBooks calculates and records home currency adjustments. In all cases, the home currency is the US Dollar (or simply, USD).
Example 1 – Home Currency Adjustment for an Open Customer Invoice
An customer is invoiced for 10,000 € (Euros, or simply EUR) on 12/15/2012 and the invoice is unpaid. The exchange rate recorded with the transaction is 1 EUR = 1.5 USD.
The exchange rate later became 1 EUR = 1.75 USD; after this exchange rate change, the open customer invoice was more valuable in USD. The result would be an unrealized gain of $2500, or the difference between the converted value as of the home currency adjustment date ($17,500) and the converted value as of the transaction date ($15,000).
The Home Currency Adjustment records a General Journal entry as a debit (increase) to the foreign balance Accounts Receivable asset account and a credit (decrease) to the Exchange Gain or Loss other expense account.
Example 2 – Home Currency Adjustment for a Closed Customer Invoice
An customer is invoiced for 10,000 € (Euros, or simply EUR) on 12/15/2012 and the invoice is initially unpaid. The exchange rate recorded with the transaction is 1 EUR = 1.5 USD. A short time later, the customer paid the invoice in full after the exchange rate changed to 1 EUR = 1.6 USD.
Immediately upon recording the customer payment at the new exchange rate, QuickBooks records a realized exchange gain for $1000, or the difference between the converted value as of the date the transaction was closed ($16,000) and the converted value as of the original transaction date ($15,000). This realized gain is not the home currency adjustment. Because both realized and unrealized exchange gains/losses are recorded in the Exchange Gain or Loss account, that’s where we’ll find this gain. Here’s a QuickZoom report of the Exchange Gain or Loss account after recording the customer payment.
After the customer payment, the company’s foreign bank account transacting in Euros has a balance – the funds just received from the customer. If the exchange rate then changed to 1 EUR = 1.75 USD, this would represent an unrealized gain that occured as a result of holding a foreign bank balance. However, only part of the overall gain is unrealized: the difference between the converted bank balance as of the home currency adjustment date ($17,500) and the converted value of the transaction as of when it was closed ($16,000). The home currency adjustment is only the unrealized portion of the overall gain, or $1500.
The overall exchange gain from this series of transactions is the same as the first example – a gain of $2500, because in both examples the exchange rate changed from 1 EUR = 1.5 USD to 1 EUR = 1.75 USD. Here’s the QuickZoom report for the Exchange Gain or Loss account showing the overall exchange gain/loss:
The first line is the realized portion of the exchange gain; the second line – the General Journal entry – is for the unrealized home currency adjustment.
This second example illustrates another aspect of foreign exchange gain/loss reporting: if every transaction were recorded using the same exchange rate, there would be no realized gains or losses. All exchange gains or losses would be unrealized and result from the difference between the converted value on the financial statement date and the converted value as of the transaction date for each foreign balance on the balance sheet. These foreign balances can include Accounts Payable, Accounts Receivable, bank accounts, and credit cards. If you do not record transactions using accurate exchange rates as of the transaction date, you’ll magnify the amount of the unrealized exchange gains or losses shown on financial statements when you do decide to perform a home currency adjustment.
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How can I generate the Unrealized Gain & Loss report for a period starting on other than Day 1? My old version of QuickBooks used to allow me to input a FROM date so that I can just see the Home Currency Adjustment needed since the end of the last reporting period. In QuickBooks Pro 2010 I can not see how to input a FROM date so the Home Currency Adjustment goes back to Day 1 and does not take in to account previous Home Currency Adjustments so the number of the Unrealized Gain & Loss report is not very useful.
I’m not sure what you mean by your “old version” of QB. Multicurrency support first appeared in US QB in 2009, and no US version of QB has had this capability. Were you using a non-US version? If so, it may be the case that Intuit moved its international editions to the way US QB works in this area.
For the way US QB works, the “from” date and any prior home currency adjustments you’ve entered are irrelevant. Home currency adjustments do not change the foreign balance; they simply adjust the foreign balance to whatever the value is in your home currency as of the financial report date. Therefore, QB is looking at your foreign balance on the report date and asking “What is this worth in the home currency?” It records a Home Currency Adjustment so that the outstanding foreign balance is valued correctly, and when you record a subsequent Home Currency Adjustment after you record the first one, QB calculates the amount of the adjustment necessary, taking into account the prior adjustments.
What some US QB users find confusing is that recording a Home Currency Adjustment doesn’t update exchange rates on the date of the adjustment. If you enter a Home Currency Adjustment, you won’t see a change in the Unrealized Gain & Loss report. You need to update exchange rates before that report will change.
The bottom line is to look at your balance sheet after you’ve valued your foreign balances for financial reporting. If the home currency values are correct, you know that QB did its job. If not, make sure you used the right exchange rates on your most recent Home Currency Adjustment!
Is there a scenario where Quickbooks would use different exchange rates for multiple invoices at one balance sheet date for revalue? I’m trying to recalculate the adjustment made at 12/31/10 and am finding that invoices with similar dates will have similar exchange rates, but invoices with different dates were revalued at a different rates. I’m not sure how this could be possible. Any help would be appreciated!!!
First, you say invoices with “similar” dates. Currency fluctuations are constant and sometimes large, so even though the dates are close, the exchange rates might be – and most likely are – different. The difference depends on how you are entering exchange rates. Are you automatically downloading them or are you updating the exchange rate when you enter a transaction such as an invoice?
All of that is important, because exchange gains/losses are based on what you SHOULD have received based on each transaction’s exchange rate and the exchange rate on the balance sheet date. There should be 1 consistent rate applied to every transaction in a single currency on a balance sheet, but the gain/loss will be different. You say that “invoices with different dates were revalued at different rates.” If you mean the gain/loss is different, that is understandable, since the exchange rate for the original transaction might be different. However, the transactions should not be revalued USING a different rate, since there is only 1 rate for each currency on a given date.
One thing that might help is to run a Custom Transaction Detail Report of the transactions in question, and on the Display tab of the report settings, select the Columns by scrolling all the way to the bottom and selecting the foreign exchange related columns. That will help you to easily see which rates were applied to each transaction.
Hope that helps.