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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I’m using quickbook version 2007/08. I have one question that how do I revalvue the currency at each month. Eg. in Feb when I key in invoice under foreign currency USD10,000 @ 1.3 = SGD13,000. Then in Mar, I would like to revalvue the rate to 1.4 and Apr revalvue rate to 1.2, and the revalvue rate only to certain AR or AP, not all AR need to be revalvue rate, what should I do in Quickbook and what does the impact? Does my version can do this?
My accountant did all foreign transactions at a rate of 1 for the entire year. When he realized the error he went back and manually adjusted all transactions. There is now a large amount in the foreign exchange line in the income statement which we are trying to understand. Does this amount get converted to retained earnings at year end?
You’d have to provide more info to get a good answer to that question, and you should really direct it to your accountant. In general, foreign exchange gains/losses are rolled into retained earnings after the close of the year. If you have large foreign exchange gains or losses, you should work with your accountant to understand how those gains or losses occurred. For example, if your home currency is USD, exchange gains occur when collection of an asset such as a receivable results in more USD than was expected when the receivable was generated. You should be able to make sense of each exchange gain or loss. If you can’t, your accountant will need to review and adjust transactions in foreign currencies.
i want my income statement in my home currency and not in any other currencies, what do i do?
Financial statement reports such as a P & L (income statement) or balance sheet are always in your home currency. Some reports show foreign balances, while other reports provide the option of showing both home currency and foreign balances.
Beware of a quirk/bug in the home currency adjustment which causes problems with Example 1. When the customer eventually pays the invoice, QB will automatically enter the full realized gain for that invoice but will not reverse the earlier unrealized gain. Your income statement and balance sheet will be incorrect. You’d expect the next home currency adjustment to correct that problem but instead it reports that no corrections are necessary. Apparently once an invoice or account has a zero foreign balance, the adjustment logic incorrectly skips that item. If the customer had paid only 9,999 EUR, leaving an open balance of 1 EUR, then the home currency adjustment would have found that transaction and would have correctly reversed the unrealized gain.
Interesting observation. We’ll have to run some tests to verify this. Meanwhile, you may want to share your observation with Intuit.
Thank you for pointing that out! I’ve just run into that same bug and couldn’t for the life of me figure out why quickbooks wouldn’t clear out that account. As a workaround, it looks like you can enter the automatic home currency adjustment, then edit it and add the missing account(s). Since their foreign currency value is zero it’s relatively easy to calculate — you just have to look at their quickreports to see the local currency value and enter that amount in the home currency adjustment journal entry.
Huge pain though. Any response to your bug report?
We never filed a bug report on this. Perhaps M Davis, the original commenter, did. Since QB 2013 was the latest public release at the time of the original comment, it would be interesting to see if the behavior in QB 2014, which is out now, alters that. In our experience, for bugs of this type, Intuit tends to fix them in the next version if they do fix them; new releases of the current and older versions get fixes for things that are more serious.
Good point re: the version. I’m still on 2013, but when I upgrade I’ll check this out and report back. If it’s not fixed I guess I’ll send a bug report. This is definitely something that could be causing potentially large errors if people aren’t aware of it.
Reporting back as promised. Quickbooks 2015 Pro now. Same bug still present. Still using the workaround of manually editing the home currency adjustment journal entry with the amounts for the missing accounts. Off to file a bug report.
Another interesting thing I just ran across while looking at this is that accounts can get permanently lodged in the Unrealized gain/loss report even if they have zero balance and zero foreign balance because due to rounding errors the report still thinks there’s $0.01 left to clear. Not sure if there’s anything to be done about that, because manually doing a 1c home currency adjustment would then give you a 1c home currency balance in the account instead. Gblah.
The Organization I work for has it’s own General ledger accounts different from the numbers on QB’s. When doing Home Currency Adjustment by default it is included under GL 77000. How can I change the default account to book it under a different GL?
Thanks.
Home currency adjustments are booked to a special account, which you can’t manage from within QB. Your best bet is to edit the special account that QB uses to match your desired settings and change the other account to different settings.
Good afternoon. I am confused on one issue. Wouldn’t unrealized gain/losses be represented on the Balance Sheet? Why does QB classify them in the Income Statement? How would I go about making the entry on a monthly basis to ensure my balance sheet and income statement are correct? I believe the only gain or loss represented on the income statement should be the items that have been paid or monies actually converted. Do you agree? Thanks so much!
In so far as the income makes its way to the balance sheet, unrealized gains/losses do impact the balance sheet. QB puts unrealized gains on the income statement because that’s consistent with US GAAP.
I think you have the notion of unrealized gains backwards in your statement that “the only gain or loss represented on the income statement should be the items that have been paid or monies actually converted.” Unrealized gains/losses are not the funds actually converted; they are the funds NOT converted. In other words, if you have A/R in a foreign currency as of an interim date, that unpaid A/R can trigger an unrealized gain/loss.
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.