Multicurrency Issues

What Is the Source of Intuit’s Foreign Exchange Rates?

Chief Mechanic · November 22, 2010 ·

The source of foreign exchange rates in QuickBooks is Wall Street On Demand, a company that provides data and tools to the financial services industry.

The question on data source for foreign exchange rates often arises out of a misunderstanding of how rates downloaded by QuickBooks should be used. These rates are only a guide, and the exchange rate recorded on a multicurrency transaction should match the exchange rate used for that specific transaction. Therefore, the real source of the exchange rates you should be recording in QuickBooks is the business or financial institution with which you engaged in a foreign currency transaction. The rate downloaded by QuickBooks can be used for comparison or, in some circumstances, an estimate in the absence of other information.

One problem with downloading foreign exchange rates in QuickBooks is that there is no ability to download rates for a day other than the current business day; in other words, QuickBooks doesn’t provide access to historical exchange rates for those times when you didn’t download a particular daily rate.

See our article on online sources for historical foreign exchange rates.

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What Are the Differences Between A/R Reports In a Multicurrency Environment?

Chief Mechanic · September 13, 2010 ·

In QuickBooks 2009 there are 6 reports to provide information about what customers or clients owe to a firm. They are:

A/R Aging Summary
A/R Aging Detail
Customer Balance Summary
Customer Balance Detail
Open Invoices
Collections Report

These reports are found on the Reports->Customers & Receivables menu selection. Each report is intended to provide certain information, and in a multicurrency environment the information reported may appear to contradict information on financial statements, such as a firm’s balance sheet. The contradiction is only apparent, because by design some of these reports do not include transactions that are included in balance sheet accounts, such as General Journal entries from home currency adjustments.

In the example reports that follow, the company’s balance sheet shows a balance for Accounts Receivable – EUR (the A/R account for the 1 customer reported) of $17,500. This balance consists of a $15,000 invoice and a $2,500 exchange gain recorded as a home currency adjustment. Home currency adjustments are recorded as General Journal entries. For simplicity, we’ve filtered these reports to show a single customer. When comparing the totals on these reports to amounts reported on a balance sheet, it’s important that filter settings for the report match the balance sheet date and include all relevant transactions for a balance sheet A/R account. However, even when filters are set appropriately, the totals on these reports may not match the balance sheet because of filters that are embedded in the reports themselves that restrict the types of customer transactions reported. These embedded filters are part of the report design and can’t be changed.

The A/R Aging Summary and A/R Aging Detail reports show unpaid invoices and statement charges by billing period but do not include General Journal entries. Therefore, these reports do not match the amount reported on the balance sheet.

QuickBooks Premier 2009 Multicurrency A/R Aging Summary

QuickBooks Premier 2009 Multicurrency A/R Aging Detail

The Customer Balance Summary and Customer Balance Detail reports show all transactions related to customers. The detail report is grouped by customer and job, where the Amount column is the original transaction amount and the Balance column is the open or unpaid amount. Because these reports show all customer transactions, they will include currency adjustments posted to a customer’s account as General Journal entries. Therefore, the total shown on these reports does match the balance sheet.

QuickBooks Premier 2009 Multicurrency Customer Balance Detail Summary Report

QuickBooks Premier 2009 Multicurrency Customer Balance Detail Report

The Open Invoices report lists unpaid invoices and statement charges, grouped and subtotaled by customer and job, but it does not include General Journal entries from currency adjustments. Therefore, the total shown on this report does not match the balance sheet.

QuickBooks Premier 2009 Multicurrency Open Invoices Report

The Collections Report lists overdue invoices and statement charges grouped by customer and job, along with the customer’s contact name and phone number. Because this report only includes invoices and statement charges, it will not include currency adjustments posted to the customer’s account as General Journal entries. Therefore, the total shown on this report does not match the balance sheet.

QuickBooks Premier 2009 Multicurrency Collections Report

If your goal is to produce detail or summary reports to substantiate the amounts reported on a firm’s balance sheet, either the Customer Balance Summary or Customer Balance Detail report is the best choice, because it includes all transactions and doesn’t exclude General Journal entries. In a multicurrency environment, where General Journal entries are common, other reports may appear to contradict the balance sheet amounts because they do not include these General Journal entries.

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Does QuickBooks Use a Spot or Average Currency Rate When Converting Multicurrency Transactions or Accounts?

Chief Mechanic · September 11, 2010 ·

A spot rate, but it’s up to the user to download current spot rates (from the Company->Manage Currency->Download Latest Exchange Rates menu selection) or enter an accurate spot rate when recording a transaction or printing reports. For example, for sales and expenses, a user needs to enter an exchange rate, as shown below in the Create Invoices window.

QuickBooks Premier 2009 Create Invoice Multicurrency

Foreign currency fluctuations for balance sheet accounts that have not been realized (such as an unpaid customer receivable) appear on the Unrealized Gains & Losses report. When a customer receivable is paid, the foreign currency gain or loss is computed at a spot rate entered when payment is received. That gain or loss has now been been realized and appears on the Realized Gains & Losses report.

We’ve written a more complete description of how multicurrency works in QuickBooks 2009. Later versions of QuickBooks haven’t changed the fundamental operation of this feature.

Multicurrency features are available in QuickBooks Pro 2009, Premier 2009, Enterprise Solutions 9.0 and later versions of those programs. They’re not available in Online Edition Basic or Plus.

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Are There Restrictions On Making General Journal Entries In a Multicurrency Environment?

Chief Mechanic · September 6, 2010 ·

Yes, there are a few restrictions on making General Journal entries in a multicurrency environment.

Only 1 foreign currency is allowed per General Journal entry
The currency of the General Journal entry must match the currency of the accounts selected or be your home currency
If you enter data in the Name field, it must match the currency of the Account field

The Currency selected in a General Journal entry represents the currency units used in the entry. A General Journal entry to an account transacting in EUR with the Currency set to USD (where USD is the home currency) is permitted – the entry will simply be converted at the Exchange Rate recorded with the General Journal entry. However, a General Journal entry between 2 accounts, 1 transacting in EUR and the other transacting in GBP (where the home currency is USD) is not permitted. Further, if the Currency for the entry is set to something other than the home currency (such as EUR if your home currency is USD), you can’t enter a General Journal entry to an account transacting in GBP even though there is just 1 foreign currency on the entry.

Here’s an example of a General Journal entry in Euros (EUR) that meets these restrictions:

QuickBooks Premier 2009 Multicurrency Make General Journal Entry

Here are some of the warning screens you’ll see if you attempt to violate these restrictions:

QuickBooks Premier 2009 General Ledger Warning 4

QuickBooks Premier 2009 General Ledger Warning 6

QuickBooks Premier 2009 General Ledger Warning 5

The restrictions on General Journal entries in a multicurrency environment are in addition to the restrictions that apply when only 1 currency is used.

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How Does QuickBooks Calculate and Record a Home Currency Adjustment?

Chief Mechanic · September 2, 2010 ·

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).

QuickBooks Premier 2009 Multicurrency Home Currency Adjustment 1

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.

QuickBooks Premier 2009 Multicurrency Home Currency Adjustment General Journal

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.

QuickBooks Premier 2009 Multicurrency Home Currency Adjustment Realized

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.

QuickBooks Premier 2009 Multicurrency Home Currency Adjustment 2

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:

QuickBooks Premier 2009 Multicurrency Home Currency Adjustment Report

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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Multicurrency Issues

Accounting

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Intuit