Doubts about how to manage forex

Sorry for the long post.

As an amateur accountant struggling to do better a job than the several “professional” accountants I have hired in the past and who failed miserably every time, I have been having lots of doubts about how to best manage forex. From the “experience” gained with over the past two year using Manager, when it comes to forex I feel there is a trade-off between using 1) interaccount transfers and forex payments through which Manager calculates automatically the exchange rates and the forex gain/losses, and 2) manually adding forex exchange rates in Settings. I believe, however, both methods can be used at the same time.

From what I understand (and I might be very wrong) using only interaccount transfers and forex payments lets the initial exchange rates (we added exchange rates for all the currencies we use, i.e. USD, EUR, ZAR, for the first day of operations of our company) stable over a whole period of time until a new exchange rate is added manually. The differences between this base line forex and the new exchange rates calculated automatically by Manager produce the forex gains/losses. This also means, I think, that for example the Cost of Goods Sold and the value of the stock in assets stays stable over the same period of time.

Using instead (also) manually added exchange rates (for examples the same exact ones that would be given by the interaccount transfers on the same dates) would increase/decrease the value for example of the cost of goods sold and inventory, while the impact of forex gains/losses would be limited or maybe 0.

This “feeling” comes for example from one instance we have: I added a RWF/USD exchange rate for the beginning of our operations in December 2015. It was 750. Since then the USD has gone up. We have done several RWF/USD exchanges over time, and the rate reached 858 in December 2017 when we exchanged some USD to RWF. However, in May 2018 we issued an invoice in RWF and received a payment in USD. From what I can see the rate used by Manager is still the initial 750, which means this invoice is not fully paid according to Manager. Obviously this is not the best solution for this payment as the requested amount in USD to the client should have covered the whole amount in RWF based on the exchange rate at the time of the payment. Based on this, I thought the difference would somehow appear somewhere in the list of forex gains/losses and I looked for a forex gain/loss on the same date of the payment from the client, but I cannot see any anything on that date. This is probably because the payment was in USD and came on our USD account so there was no conversion.

This topic is pretty important to our business in context in which our local currency slowly but constantly loses its value against all other major currencies. In fact I have the feeling that by relying only on automatic exchange rates the cost of goods appears to be lower than it truly is and our pricing strategy might be heavily impacted if we rely too much on the average costs of each item, our margins might be too low. At the same time, high forex gains/losses (especially losses) are seen suspiciously by tax authorities. Instead I would like to have more reliable costs of goods and limit the impact of forex gains/losses, and maybe adding exchange rates manually might do the trick.

I am not sure if this makes sense, but can someone give some advice on how to manage forex in Manager by using manually added exchange rates and/or interaccount transfers and forex payments? Is there a guide maybe somewhere on this topic? Can someone also give a clear explanation on how to read the single forex gains/losses transactions?

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I think the confusion is that you assume that interaccount transfers should affect global exchange rate but that’s not the case.

If you set exchange rate under Settings to 750, it will be 750 until you set another exchange rate under Settings. When you do that, your foreign currency accounts get revaluated to reflect exchange gain or loss.

You don’t have to enter exchange rates under Settings on daily basis. It’s OK to update them on monthly basis and many businesses can get away updating them on annual basis only.

I have some ideas how to improve reporting of currency gains / losses to make it more obvious how calculations have been done. For the time being, if you think there is a bug in multi-currency implementation, you should create a test file with a few transactions to demonstrate the issue. As far as I know, there is no known bug in multi-currency implementation as of now.

I have made a stab at analyzing this complex topic and it has almost done my head in, so I apologize in advance if I have made any glaring errors.

I think what needs to be done is to separate unrealized gains from realized gains and suggest the following in regard to this:

  1. The existing account of Forex gains/losses in the P&L be renamed to, say, Realized Forex gains/losses.

  2. A new balance sheet account be created named, say, Unrealized Forex gains/losses.

  3. Accrual transactions (open transactions), in other than the base currency, such as Sales Invoices, Debit Notes, Purchase Invoices, Credit Notes, Payslips, etc, be assessed as Unrealized foreign gains/losses at each change in exchange rate.

  4. Cash transactions, in other than the base currency, such as Receipts & Payments (both direct and invoice) and Inter Account Transfers, etc, be assessed for Realized foreign gains/losses at each change in exchange rate.

  5. Accrual transactions as in “3.” above be reversed when full payment occurs (reduced when part payment occurs) from Unrealized foreign gains/losses.

  6. Extra columns be included in the Forex gains/losses view screen to distinguish between Unrealized and Realized Forex gains/losses.

The other observation I would make is that, to ensure accurate values for Unrealized Forex gains/losses, Realized Forex gains/losses and “Inventory cost”, exchange rates should be recorded on the date of each Forex cash transaction and, also, of course, on the end date of each reporting period. This is especially relevant to volatile currencies that have substantial short term movements.

As a follow up to my last post. Funds held in Forex accounts would be assessed as Unrealized Forex gains/losses at each change in the exchange rate.

@lubos Thank you for the explanation. I will discuss this with our auditors and see what they suggest in terms of the frequency of the exchange rates to be manually added. I think we could even do once a year on the last day of each year.

@generalegend Your analysis and suggestion is very interesting. It makes things more complicated but I think it would make all figures more realistic. I will also discuss this with our auditors and get their input.

Thank you both.

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You’re welcome @mauroskov.

Further thoughts on my suggestion are that Realized Forex gains/losses could be assessed at transaction level where exchange rate is entered for Cash transactions in transactions involving other than the base currency.

Then Unrealized Forex gains/losses could be assessed similar to the existing setup requiring only nominating an exchange rate at reporting dates.

An organization could consider all forex gains and losses as realised or not. Of course manager treats all forex gains and losses as realised. I’m totally okay with it.

If the system could have features that could separate realised forex gains and losses from unrealised forex gains and losses that would also be fine.

Read
http://help.sage300.com/en-us/2017/web/Content/CommonServices/MulticurrencyDatabases/AboutAccountingForExchangeGainsLosses.htm

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Methods of accounting recognition and presentation will vary according to both location and tax regime and businesses will make their preferences according to those allowable by the standards in their jurisdiction.

The current setup in “Manager” makes it very difficult to separate the Unrealized Forex gains/losses from the Realized. Reporting these separately would make it much easier for those who choose to use the “Realized and Unrealized gains/losses” method, without making it more difficult for those who choose to use the “Recognized” method. Especially, if an option is provided to select the destination of the gain/loss account(s) either in the P&L or the Balance sheet.

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I agree with @generalegend, Manager needs to be able to separate unrealized and realized forex gains / losses. It think it would even make it easier to understand.

Not to mention, in many countries, unrealized forex gains / losses are not asssable for income tax purposes.

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That is indeed our case. It is always risky to use forex losses for the end of the year profit and loss statement therefore we have to be very sharp in reporting them.

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Hi, sorry for bumping an old topic, but unrealized/realized forex has reared its ugly head once again, as we close 2019. Has the situation changed with Manager at all since this thread? As far as I can tell all forex movements are still classified the same, unless there’s some subtlty I’m missing?

Many thanks!